Chapter 13 - Test Bank

Chapter 13 - Property, Property, Plant, and Equipment: Depreciation and Depletion Chapter 13 Property, Plant, and Equipment: Depreciation and Depletion True / False Questions 1. The auditors' approach to the audit of property, plant, and equipment larely results from the fact that relati!ely fe" transactions occur. True #alse $. % ma&or control procedure related to plant and equipment is a udet for depreciation. True #alse 3. E!idence of continued o"nership of property is otained y !ouchin payments to a mortae trustee. True #alse (. The auditors typically oser!e all ma&or items of property, plant, and equipment e!ery year. True #alse ). *aterial purchases of assets from an affiliated company should e disclosed in the financial statements. True #alse +. dle equipment "ill enerally need to e reclassified as a current asset. True #alse . The primary purpose of internal control o!er plant and equipment is to safeuard the assets from theft. True #alse 13-1 Chapter 13 - Property, Property, Plant, and Equipment: Depreciation and Depletion . % typical procedure in the audit of property is e/amination of pulic records to !erify the o"nership of the property p roperty.. True #alse 0. E!en "hen internal control is "ea, a sinificant portion of the audit "or on property,  plant, and equipment may e performed at an interim date. True #alse 12. n the audit of depletion d epletion the auditors must often rely on the "or of specialists. True #alse Multiple Choice Questions 11. %n auditor has identified numerous deits to accumulated depreciation of equipment. hich of the follo"in is most liely4 %. The estimated remainin useful li!es of equipment "ere increased. 5. Plant assets "ere retired durin the year. C. The prior year's deprecation e/pense e/pe nse "as erroneously understated. D. 6!erhead allocations "ere re!ised at year-end. 1$. n testin for unrecorded retirements of equipment, an auditor miht: %. 7elect items of equipment from the accountin accoun tin records and then attempt to locate them durin the plant tour. 5. Compare depreciation e/pense "ith the prior year's depreciation e/pense. C. Trace equipment items oser!ed durin the plant tour to the equipment susidiary leder. D. 7can the eneral &ournal for unusual equipment retirements. 13-$ Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion 13. % plant manaer "ould e most liely to pro!ide information on "hich of the follo"in4 %. %dequacy of the pro!ision for uncollectile accounts. 5. %ppropriateness of physical in!entory !aluation techniques. C. E/istence of osolete production equipment. D. Deferral of certain purchases of office supplies. 1(. hich of the follo"in "ould e least  liely to address control o!er the initiation and e/ecution of equipment transactions4 %. 8equests for ma&or repairs are appro!ed y a hiher le!el than the department initiatin the request. 5. Prenumered purchase orders are used for equipment and periodically accounted for. C. 8equests for purchases of equipment are re!ie"ed for consideration of solicitin competiti!e ids. D. Procedures e/ist to restrict access to equipment. 1). hen there are numerous property and equipment transactions durin the year, an auditor "ho plans to assess control ris at a lo" le!el usually performs: %. Tests of controls and e/tensi!e tests of property and equipment alances at the end of the year. 5. %nalytical procedures for current year property and equipment transactions. C. Tests of controls and limited tests of current year property and equipment transactions. D. %nalytical procedures for property and equipment alances at the end of the year. 1+. hich of the follo"in est descries the auditors' approach to the audit of the endin  alance of property, plant and equipment for a continuin nonpulic client4 %. Direct audit of the endin alance. 5. %reement of the einnin alance to prior year's "orin papers and audit of sinificant chanes in the accounts. C. %udit of chanes in the accounts since inception of the company. D. %udit of selected purchases and retirements for the last fe" years. 13-3 Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion 1. hich of the follo"in is not  a control that should e estalished for purchases of equipment4 %. Estalishin a udet for capital acquisitions. 5. 8equirin that the department in need of the equipment order the equipment. C. 8equirin that the recei!in department recei!e the equipment. D. Estalishin an accountin policy reardin the minimum dollar amount of purchase that "ill e considered for capitali9ation. 1. hich of the follo"in is not  one of the auditors' o&ecti!es in auditin depreciation4 %. Estalishin the reasonaleness of the client's replacement policy. 5. Estalishin that the methods used are appropriate. C. Estalishin that the methods are consistently applied. D. Estalishin the reasonaleness of depreciation computations. 10. hich of the follo"in is the est e!idence of continuous o"nership of property4 %. E/amination of the deed. 5. E/amination of rent receipts from lessees of the property. C. E/amination of the title policy. D. E/amination of canceled chec in payment for the property. $2. hich of the follo"in est descries the auditors' typical oser!ation of plant and equipment4 %. The auditors oser!e a physical in!entory of plant and equipment, annually. 5. The auditors oser!e all additions to plant and equipment made durin the year. C. The auditors oser!e all ma&or plant and equipment items in the clients' accounts each year. D. The auditors oser!e ma&or additions to plant and equipment made durin the year. $1. hich of the follo"in is used to otain e!idence that the client's equipment accounts are not  understated4 %. %naly9in repairs and maintenance e/pense accounts. 5. ouchin purchases of plant and equipment. C. 8ecomputin depreciation e/pense. D. %naly9in the miscellaneous re!enue account. 13-( Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion $$. hich of the follo"in is not  a test primarily used to test property, plant and equipment accounts for o!erstatement4 %. n!estiation of reductions in insurance co!erae. 5. 8e!ie" of property ta/ ills. C. E/amination of retirement "or orders prepared durin the year. D. ouchin retirements of plant and equipment. $3. % continuin audit client's property, plant, and equipment and accounts recei!ale accounts ha!e appro/imately the same year-end alance. n this circumstance, "hen compared to property, plant, and equipment, one "ould normally e/pect the audit of accounts recei!ale to require: %. *ore audit time. 5. ;ess audit time. C. %ppro/imately the same amount of audit time. D. 7imilar confirmation procedures. $(. hen comparin an initial audit "ith a susequent year audit for a p articular client, the scope of audit procedures for "hich of the follo"in accounts "ould e e/pected to decrease the most4 %. %ccounts recei!ale. 5. Cash. C. *aretale securities. D. Property, plant, and equipment. $). hen performin an audit of the property, plant, and equipment accounts, an auditor should e/pect "hich of the follo"in to e most liely to indicate a departure from enerally accepted accountin principles4 %. 8epairs ha!e een capitali9ed to repair equipment that had roen do"n. 5. nterest has een capitali9ed for self-constructed assets. C. %ssets ha!e een acquired from affiliated corporations "ith the related transactions recorded and descried in the financial statements. D. The cost of freiht-in on an acquisition has een capitali9ed. 13-) Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion $+. The most liely technique for the current year audit of ood"ill "hich "as acquired three years ao y a continuin audit client: %. Confirmation. 5. 6ser!ation. C. 8ecomputation. D. nquiry. $. #or "hich of the follo"in accounts is it most liely that most of the audit "or ca n e  performed in ad!ance of the alance sheet date4 %. %ccounts recei!ale. 5. Cash. C. Current maretale securities. D. Property, plant, and equipment. $. The auditors may e/pect a proper deit to ood"ill due to: %. Purchase of a trademar. 5. Estalishment of an e/traordinarily profitale product. C. % usiness comination. D. Capitali9ation of human resources. $0. hich of the follo"in is a customary audit procedure for the !erification of the leal o"nership of real property4 %. E/amination of correspondence "ith the corporate counsel concernin acquisition matters. 5. E/amination of o"nership documents reistered and on file at a pulic hall of records. C. E/amination of corporate minutes and resolutions concernin the appro!al to acquire  property, plant, and equipment. D. E/amination of deeds and title uaranty policies on hand. 13-+ Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion 32. n !iolation of company policy, ;o"ell Company erroneously capitali9ed the cost of  paintin its "arehouse. The auditors e/aminin ;o"ell's financial statements "ould most liely detect this "hen: %. Discussin capitali9ation policies "ith ;o"e ll's controller. 5. E/aminin maintenance e/pense accounts. C. 6ser!in, durin the physical in!entory oser!ation, that the "arehouse had een painted. D. E/aminin the construction "or orders supportin items capitali9ed du rin the year. 31. hich of the follo"in est descries the independent auditors' approach to otainin satisfaction concernin depreciation e/pense in the income statement4 %. erify the mathematical accuracy of the amounts chared to income as a result of depreciation e/pense. 5. Determine the method for computin depreciation e/pense and ascertain that is in accordance "ith enerally accepted accountin principles. C. 8econcile the amount of depreciation e/pense to those amounts credited to accumulated depreciation accounts. D. Estalish the asis for depreciale assets and !erify the depreciation e/pense. 3$. The auditors are least  liely to learn of retirements of equipment throuh "hich of the follo"in4 %. 8e!ie" of the purchase returns and allo"ances account. 5. 8e!ie" of depreciation. C. %nalysis of the deits to the accumulated depreciation account. D. 8e!ie" of insurance policy riders. 33. #or "hich of the follo"in leder accounts "ould the auditor e most liely to analy9e the details to identify understatements of equipment acquisitions4 %. 7er!ice 8e!enue. 5. 7ales. C. 8epairs and maintenance e/pense. D. 7ales salaries e/pense. 13- Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion 3(. hich of the follo"in is the most important con trol procedure o!er acquisitions of  property, plant, and equipment4 %. Estalishin a "ritten company policy distinuishin et"een capital and re!enue e/penditures. 5.
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Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion

Chapter 13
Property, Plant, and Equipment: Depreciation and Depletion
True / False Questions

1. The auditors' approach to the audit of property, plant, and equipment largely results from
the fact that relatively few transactions occur.
True False

2. A major control procedure related to plant and equipment is a budget for depreciation.
True False

3. Evidence of continued ownership of property is obtained by vouching payments to a
mortgage trustee.
True False

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

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

6. Idle equipment will generally need to be reclassified as a current asset.
True False

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

13-1

Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion

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

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.
True False

10. In the audit of depletion the auditors must often rely on the work of specialists.
True False

Multiple Choice Questions

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 deprecation expense was erroneously understated.
D. Overhead allocations were revised at year-end.

12. In testing for unrecorded retirements of equipment, an auditor might:
A. Select items of equipment from the accounting records and then attempt to locate them
during the plant tour.
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.

13-2

Procedures exist to restrict access to equipment. Agreement of the beginning balance to prior year's working papers and audit of significant changes in the accounts. B. D. Deferral of certain purchases of office supplies. Appropriateness of physical inventory valuation techniques.Chapter 13 . C. Plant. Which of the following would be least likely to address control over the initiation and execution of equipment transactions? A. B. C. B. 13-3 . Adequacy of the provision for uncollectible accounts. When there are numerous property and equipment transactions during the year. B. an auditor who plans to assess control risk at a low level usually performs: A. A plant manager would be most likely to provide information on which of the following? A. D. 16. D. Analytical procedures for current year property and equipment transactions. Tests of controls and limited tests of current year property and equipment transactions.Property. D. Which of the following best describes the auditors' approach to the audit of the ending balance of property. Tests of controls and extensive tests of property and equipment balances at the end of the year. Audit of selected purchases and retirements for the last few years. and Equipment: Depreciation and Depletion 13. 15. Analytical procedures for property and equipment balances at the end of the year. 14. Existence of obsolete production equipment. Direct audit of the ending balance. Requests for major repairs are approved by a higher level than the department initiating the request. Requests for purchases of equipment are reviewed for consideration of soliciting competitive bids. C. C. Audit of changes in the accounts since inception of the company. plant and equipment for a continuing nonpublic client? A. Prenumbered purchase orders are used for equipment and periodically accounted for.

C. Requiring that the department in need of the equipment order the equipment. D. The auditors observe all additions to plant and equipment made during the year. B. Recomputing depreciation expense. C.Chapter 13 . Establishing that the methods used are appropriate. and Equipment: Depreciation and Depletion 17. Which of the following best describes the auditors' typical observation of plant and equipment? A. Which of the following is not one of the auditors' objectives in auditing depreciation? A. Which of the following is the best evidence of continuous ownership of property? A. The auditors observe a physical inventory of plant and equipment. Examination of the deed. Establishing an accounting policy regarding the minimum dollar amount of purchase that will be considered for capitalization. The auditors observe major additions to plant and equipment made during the year. B. Establishing the reasonableness of the client's replacement policy. annually. C. The auditors observe all major plant and equipment items in the clients' accounts each year. Examination of rent receipts from lessees of the property. 21. C. D. B. Plant. 19. Examination of canceled check in payment for the property. D. D. 13-4 . 18. Establishing a budget for capital acquisitions. D. Establishing the reasonableness of depreciation computations. B. Analyzing repairs and maintenance expense accounts. Requiring that the receiving department receive the equipment. Establishing that the methods are consistently applied. Which of the following is not a control that should be established for purchases of equipment? A. Vouching purchases of plant and equipment. B. Examination of the title policy.Property. C. Analyzing the miscellaneous revenue account. 20. Which of the following is used to obtain evidence that the client's equipment accounts are not understated? A.

In this circumstance. plant and equipment accounts for overstatement? A. 13-5 . Assets have been acquired from affiliated corporations with the related transactions recorded and described in the financial statements. Interest has been capitalized for self-constructed assets. D. 25. and equipment. plant. B. 23. The cost of freight-in on an acquisition has been capitalized. the scope of audit procedures for which of the following accounts would be expected to decrease the most? A. C. Cash. More audit time.Property. plant. Repairs have been capitalized to repair equipment that had broken down. plant.Chapter 13 . and equipment. Investigation of reductions in insurance coverage. Review of property tax bills. C. and equipment accounts. Examination of retirement work orders prepared during the year. When comparing an initial audit with a subsequent year audit for a particular client. B. B. 24. Accounts receivable. Which of the following is not a test primarily used to test property. D. Approximately the same amount of audit time. Property. and Equipment: Depreciation and Depletion 22. plant. one would normally expect the audit of accounts receivable to require: A. When performing an audit of the property. A continuing audit client's property. and equipment and accounts receivable accounts have approximately the same year-end balance. C. Plant. Marketable securities. B. Similar confirmation procedures. C. Less audit time. when compared to property. an auditor should expect which of the following to be most likely to indicate a departure from generally accepted accounting principles? A. D. D. Vouching retirements of plant and equipment.

plant. Examination of deeds and title guaranty policies on hand. 27. Plant. Current marketable securities. and Equipment: Depreciation and Depletion 26. C.Property. Recomputation. D. Cash. The auditors may expect a proper debit to goodwill due to: A. C. Property. Accounts receivable. and equipment. Observation. A business combination. and equipment. C. Examination of ownership documents registered and on file at a public hall of records. Examination of corporate minutes and resolutions concerning the approval to acquire property. Inquiry.Chapter 13 . Capitalization of human resources. Establishment of an extraordinarily profitable product. Purchase of a trademark. Which of the following is a customary audit procedure for the verification of the legal ownership of real property? A. B. 29. B. 13-6 . D. plant. For which of the following accounts is it most likely that most of the audit work can be performed in advance of the balance sheet date? A. The most likely technique for the current year audit of goodwill which was acquired three years ago by a continuing audit client: A. D. Examination of correspondence with the corporate counsel concerning acquisition matters. 28. C. B. B. Confirmation. D.

C. Repairs and maintenance expense. Reconcile the amount of depreciation expense to those amounts credited to accumulated depreciation accounts. The auditors examining Lowell's financial statements would most likely detect this when: A. 31. C. Sales. For which of the following ledger accounts would the auditor be most likely to analyze the details to identify understatements of equipment acquisitions? A. C. Analysis of the debits to the accumulated depreciation account. during the physical inventory observation. Review of depreciation. D. Sales salaries expense. Determine the method for computing depreciation expense and ascertain that is in accordance with generally accepted accounting principles. Examining maintenance expense accounts.Property. Observing. 33. B. The auditors are least likely to learn of retirements of equipment through which of the following? A. Review of insurance policy riders. that the warehouse had been painted. Lowell Company erroneously capitalized the cost of painting its warehouse.Chapter 13 . Plant. B. D. D. Which of the following best describes the independent auditors' approach to obtaining satisfaction concerning depreciation expense in the income statement? A. In violation of company policy. Discussing capitalization policies with Lowell's controller. C. Review of the purchase returns and allowances account. Examining the construction work orders supporting items capitalized during the year. Verify the mathematical accuracy of the amounts charged to income as a result of depreciation expense. Establish the basis for depreciable assets and verify the depreciation expense. B. 13-7 . D. B. Service Revenue. and Equipment: Depreciation and Depletion 30. 32.

D. Using a budget to forecast and control acquisitions and retirements. 35.Chapter 13 . Extent of property abandoned during the year. In the examination of property. Segregation of duties of employees in the accounts payable department. plant. and equipment? A. Review and approval of the monthly depreciation entry by the plant supervisor. D. Analyzing monthly variances between authorized expenditures and actual costs. Requiring acquisitions to be made by user departments.Property. Investigation of variances within a formal budgeting system. C. Property acquisitions that are misclassified as maintenance expense would most likely be detected by an internal control system that provides for: A. C. 36. and equipment. Plant. Which of the following is the most important control procedure over acquisitions of property. Examination by the internal auditors of vendor invoices and canceled checks for property acquisitions. D. plant. B. C. Extent of the control risk. 13-8 . Establishing a written company policy distinguishing between capital and revenue expenditures. B. and Equipment: Depreciation and Depletion 34. Adequacy of replacement funds. the auditor tries to determine all of the following except the: A. B. Reasonableness of the depreciation.

a. List and describe four major controls applicable to plant and equipment. 38. Plant and equipment are not as inherently risky as are other assets. b. He has indicated to you that he believes the following items should not be capitalized. However. a company should still endeavor to maintain effective internal control over plant and equipment. a staff member on the audit. such as inventories and accounts receivable. Indicate with an "X" whether you believe the item should be capitalized or expensed.Chapter 13 .Property. and Equipment: Depreciation and Depletion Essay Questions 37. identified a number of items that have been included as additions to property. 13-9 . Bill Jones. During the audit of Zing Company. plant. Describe the principal purpose of internal controls relating to plant and equipment. Plant. and equipment.

13-10 . Describe three ways that the auditors obtain evidence that there are no significant amounts of unrecorded retirements of equipment. Auditors should obtain evidence that there are no significant amounts of unrecorded retirements of property.Property. Plant. plant and equipment. a.Chapter 13 . and Equipment: Depreciation and Depletion 39. b. Describe two ways that the auditors obtain evidence that there are no significant amounts of unrecorded retirements of property (land).

and Equipment 13-11 . TRUE AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Remember Difficulty: Easy Learning Objective: 13-02 Identify the auditors' objectives in the audit of property. and equipment largely results from the fact that relatively few transactions occur. Topic: Property. and Equipment: Depreciation and Depletion Chapter 13 Property. The auditors' approach to the audit of property. Plant. and equipment. Plant. plant.Property. and Equipment 2. Plant. plant.Chapter 13 . Topic: Property. and equipment. and Equipment: Depreciation and Depletion Answer Key True / False Questions 1. Plant. plant. FALSE AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Understand Difficulty: Medium Learning Objective: 13-03 Explain the fundamental controls over property. A major control procedure related to plant and equipment is a budget for depreciation.

plant. plant. Topic: Property. Evidence of continued ownership of property is obtained by vouching payments to a mortgage trustee. Plant. Plant. and Equipment 4. and equipment and design further audit procedures. plant. and equipment every year. Plant. Topic: Audit of Property.Property. including tests of controls and substantive procedures. and equipment. and Equipment 13-12 . and Equipment: Depreciation and Depletion 3. TRUE AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement AICPA FN: Risk Analysis Bloom's: Understand Difficulty: Medium Learning Objective: 13-06 Assess the risks of material misstatement of property. to address the risks. FALSE AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Understand Difficulty: Medium Learning Objective: 13-03 Explain the fundamental controls over property. The auditors typically observe all major items of property.Chapter 13 .

to address the risks. and equipment and design further audit procedures. and Equipment 6. Plant. and Equipment 7. Topic: Property. TRUE AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement AICPA FN: Risk Analysis Bloom's: Remember Difficulty: Easy Learning Objective: 13-06 Assess the risks of material misstatement of property. and Equipment: Depreciation and Depletion 5. to address the risks. Plant. FALSE AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Understand Difficulty: Medium Learning Objective: 13-03 Explain the fundamental controls over property. Plant. Material purchases of assets from an affiliated company should be disclosed in the financial statements. Topic: Audit of Property. The primary purpose of internal control over plant and equipment is to safeguard the assets from theft.Property. and equipment. plant. FALSE AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement AICPA FN: Risk Analysis Bloom's: Remember Difficulty: Easy Learning Objective: 13-06 Assess the risks of material misstatement of property. and Equipment 13-13 . and equipment and design further audit procedures. including tests of controls and substantive procedures. including tests of controls and substantive procedures. Idle equipment will generally need to be reclassified as a current asset. Plant. plant. Topic: Audit of Property.Chapter 13 . plant.

Even when internal control is weak. a significant portion of the audit work on property. and equipment and design further audit procedures. and Equipment 9. TRUE AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Understand Difficulty: Medium Learning Objective: 13-08 Describe how the auditors design audit procedures to audit intangible assets. to address the risks. In the audit of depletion the auditors must often rely on the work of specialists. and equipment and design further audit procedures. Plant.Chapter 13 . to address the risks. Plant. FALSE AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement AICPA FN: Risk Analysis Bloom's: Apply Difficulty: Hard Learning Objective: 13-06 Assess the risks of material misstatement of property. TRUE AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement AICPA FN: Risk Analysis Bloom's: Apply Difficulty: Hard Learning Objective: 13-06 Assess the risks of material misstatement of property. including tests of controls and substantive procedures. and Equipment 10. Topic: Audit of Property. and equipment may be performed at an interim date. including tests of controls and substantive procedures. plant. and Equipment: Depreciation and Depletion 8. Topic: Depreciation 13-14 . plant. plant. Topic: Audit of Property. Plant.Property. A typical procedure in the audit of property is examination of public records to verify the ownership of the property.

Topic: Depreciation 12. Plant assets were retired during the year. Overhead allocations were revised at year-end. including tests of controls and substantive procedures. plant. Select items of equipment from the accounting records and then attempt to locate them during the plant tour. The estimated remaining useful lives of equipment were increased.Chapter 13 . Trace equipment items observed during the plant tour to the equipment subsidiary ledger. an auditor might: A. The prior year's deprecation expense was erroneously understated. Plant. In testing for unrecorded retirements of equipment. Topic: Audit of Property. B. B. D. An auditor has identified numerous debits to accumulated depreciation of equipment. and equipment and design further audit procedures. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement AICPA FN: Risk Analysis Bloom's: Understand Difficulty: Medium Learning Objective: 13-06 Assess the risks of material misstatement of property. C. Plant. and Equipment 13-15 . Which of the following is most likely? A. and Equipment: Depreciation and Depletion Multiple Choice Questions 11. to address the risks. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Apply Difficulty: Hard Learning Objective: 13-07 Explain the auditors' approach to the audit of depreciation. Compare depreciation expense with the prior year's depreciation expense. Scan the general journal for unusual equipment retirements. D. C.Property.

D. Which of the following would be least likely to address control over the initiation and execution of equipment transactions? A. plant. and equipment and design further audit procedures.Chapter 13 . Existence of obsolete production equipment. B. Adequacy of the provision for uncollectible accounts. Topic: Audit of Property. Procedures exist to restrict access to equipment. D. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Apply Difficulty: Hard Learning Objective: 13-03 Explain the fundamental controls over property. Deferral of certain purchases of office supplies. C. plant. Topic: Property. C. Appropriateness of physical inventory valuation techniques. A plant manager would be most likely to provide information on which of the following? A. to address the risks. and Equipment 14. Requests for purchases of equipment are reviewed for consideration of soliciting competitive bids. and Equipment: Depreciation and Depletion 13. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement AICPA FN: Risk Analysis Bloom's: Understand Difficulty: Medium Learning Objective: 13-06 Assess the risks of material misstatement of property. B.Property. including tests of controls and substantive procedures. Plant. Plant. Requests for major repairs are approved by a higher level than the department initiating the request. Plant. and Equipment 13-16 . and equipment. Prenumbered purchase orders are used for equipment and periodically accounted for.

C. plant. and equipment and design further audit procedures. Tests of controls and extensive tests of property and equipment balances at the end of the year. Topic: Audit of Property. Analytical procedures for property and equipment balances at the end of the year.Property. plant. B. and Equipment 13-17 . Analytical procedures for current year property and equipment transactions. Audit of changes in the accounts since inception of the company.Chapter 13 . Agreement of the beginning balance to prior year's working papers and audit of significant changes in the accounts. to address the risks. When there are numerous property and equipment transactions during the year. including tests of controls and substantive procedures. Topic: Audit of Property. Direct audit of the ending balance. Audit of selected purchases and retirements for the last few years. and equipment and design further audit procedures. including tests of controls and substantive procedures. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement AICPA FN: Risk Analysis Bloom's: Apply Difficulty: Hard Learning Objective: 13-06 Assess the risks of material misstatement of property. plant and equipment for a continuing nonpublic client? A. Plant. and Equipment: Depreciation and Depletion 15. C. B. D. D. to address the risks. Which of the following best describes the auditors' approach to the audit of the ending balance of property. an auditor who plans to assess control risk at a low level usually performs: A. and Equipment 16. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement AICPA FN: Risk Analysis Bloom's: Understand Difficulty: Medium Learning Objective: 13-06 Assess the risks of material misstatement of property. Tests of controls and limited tests of current year property and equipment transactions. Plant. Plant.

plant. Establishing a budget for capital acquisitions. Topic: Audit of Property. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Understand Difficulty: Medium Learning Objective: 13-03 Explain the fundamental controls over property. Examination of canceled check in payment for the property.Chapter 13 . Which of the following is not one of the auditors' objectives in auditing depreciation? A. Establishing that the methods used are appropriate. Establishing an accounting policy regarding the minimum dollar amount of purchase that will be considered for capitalization. plant.Property. including tests of controls and substantive procedures. D. Establishing the reasonableness of depreciation computations. and Equipment 13-18 . D. Plant. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Remember Difficulty: Easy Learning Objective: 13-07 Explain the auditors' approach to the audit of depreciation. C. and Equipment: Depreciation and Depletion 17. Establishing the reasonableness of the client's replacement policy. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement AICPA FN: Risk Analysis Bloom's: Apply Difficulty: Hard Learning Objective: 13-06 Assess the risks of material misstatement of property. Topic: Depreciation 19. Requiring that the receiving department receive the equipment. Plant. C. Which of the following is the best evidence of continuous ownership of property? A. C. Examination of the title policy. B. D. and equipment and design further audit procedures. B. Which of the following is not a control that should be established for purchases of equipment? A. Establishing that the methods are consistently applied. to address the risks. B. Requiring that the department in need of the equipment order the equipment. Topic: Property. Examination of the deed. and equipment. and Equipment 18. Examination of rent receipts from lessees of the property. Plant.

D. and equipment and design further audit procedures. The auditors observe a physical inventory of plant and equipment. Analyzing the miscellaneous revenue account. including tests of controls and substantive procedures.Property. Vouching purchases of plant and equipment. to address the risks. and Equipment 21. plant. and Equipment: Depreciation and Depletion 20. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement AICPA FN: Risk Analysis Bloom's: Understand Difficulty: Medium Learning Objective: 13-06 Assess the risks of material misstatement of property. C. The auditors observe major additions to plant and equipment made during the year. Plant. to address the risks. Plant. Which of the following is used to obtain evidence that the client's equipment accounts are not understated? A. Topic: Audit of Property. The auditors observe all additions to plant and equipment made during the year. including tests of controls and substantive procedures. B. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement AICPA FN: Risk Analysis Bloom's: Apply Difficulty: Hard Learning Objective: 13-06 Assess the risks of material misstatement of property. D. Which of the following best describes the auditors' typical observation of plant and equipment? A. Topic: Audit of Property.Chapter 13 . plant. Recomputing depreciation expense. C. and equipment and design further audit procedures. The auditors observe all major plant and equipment items in the clients' accounts each year. Analyzing repairs and maintenance expense accounts. Plant. B. annually. and Equipment 13-19 .

and equipment. Investigation of reductions in insurance coverage. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement AICPA FN: Risk Analysis Bloom's: Apply Difficulty: Hard Learning Objective: 13-06 Assess the risks of material misstatement of property. C. one would normally expect the audit of accounts receivable to require: A. B. Topic: Audit of Property. and Equipment 13-20 . plant and equipment accounts for overstatement? A. plant. Plant. In this circumstance. A continuing audit client's property. including tests of controls and substantive procedures. B. and equipment and design further audit procedures. plant. Plant. plant. and Equipment: Depreciation and Depletion 22. Similar confirmation procedures. and Equipment 23. Examination of retirement work orders prepared during the year. C. Review of property tax bills. and equipment and accounts receivable accounts have approximately the same year-end balance. Plant. to address the risks. Vouching retirements of plant and equipment. plant. when compared to property. More audit time.Property. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Understand Difficulty: Medium Learning Objective: 13-02 Identify the auditors' objectives in the audit of property. D. Topic: Property. and equipment. Less audit time. Approximately the same amount of audit time. D. Which of the following is not a test primarily used to test property.Chapter 13 .

C. to address the risks. C. Plant. and Equipment 25. plant. and equipment. Topic: Audit of Property. and equipment. Topic: Property. Property. plant. including tests of controls and substantive procedures. D. Repairs have been capitalized to repair equipment that had broken down. Accounts receivable. and Equipment 13-21 .Property. Plant. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement AICPA FN: Risk Analysis Bloom's: Understand Difficulty: Medium Learning Objective: 13-06 Assess the risks of material misstatement of property. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Understand Difficulty: Medium Learning Objective: 13-03 Explain the fundamental controls over property. Cash. Interest has been capitalized for self-constructed assets. an auditor should expect which of the following to be most likely to indicate a departure from generally accepted accounting principles? A. Plant. The cost of freight-in on an acquisition has been capitalized. B.Chapter 13 . and Equipment: Depreciation and Depletion 24. plant. Marketable securities. the scope of audit procedures for which of the following accounts would be expected to decrease the most? A. plant. Assets have been acquired from affiliated corporations with the related transactions recorded and described in the financial statements. and equipment and design further audit procedures. D. When performing an audit of the property. and equipment accounts. When comparing an initial audit with a subsequent year audit for a particular client. B.

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Understand Difficulty: Medium Learning Objective: 13-08 Describe how the auditors design audit procedures to audit intangible assets. and Equipment: Depreciation and Depletion 26. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Understand Difficulty: Medium Learning Objective: 13-08 Describe how the auditors design audit procedures to audit intangible assets. Property. Recomputation. and equipment. A business combination. C. For which of the following accounts is it most likely that most of the audit work can be performed in advance of the balance sheet date? A. Plant. plant. D. The auditors may expect a proper debit to goodwill due to: A. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement AICPA FN: Risk Analysis Bloom's: Understand Difficulty: Medium Learning Objective: 13-06 Assess the risks of material misstatement of property.Property. Confirmation. The most likely technique for the current year audit of goodwill which was acquired three years ago by a continuing audit client: A. Accounts receivable. D. plant. B. Purchase of a trademark. B. Current marketable securities. C. to address the risks. Inquiry. Establishment of an extraordinarily profitable product. and Equipment 28. and equipment and design further audit procedures. B. Topic: Audit of Property. Observation. C.Chapter 13 . Capitalization of human resources. Cash. including tests of controls and substantive procedures. Topic: Depreciation 13-22 . Plant. Topic: Depreciation 27. D.

plant. Examining maintenance expense accounts. Lowell Company erroneously capitalized the cost of painting its warehouse. including tests of controls and substantive procedures. plant. B. and Equipment: Depreciation and Depletion 29. that the warehouse had been painted. to address the risks. D. and equipment. C. Which of the following is a customary audit procedure for the verification of the legal ownership of real property? A. In violation of company policy. Observing. Examining the construction work orders supporting items capitalized during the year. Source: AICPA Topic: Audit of Property. plant. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement AICPA FN: Risk Analysis Bloom's: Understand Difficulty: Medium Learning Objective: 13-06 Assess the risks of material misstatement of property. to address the risks. during the physical inventory observation. The auditors examining Lowell's financial statements would most likely detect this when: A. Examination of deeds and title guaranty policies on hand.Property. Plant.Chapter 13 . C. and equipment and design further audit procedures. Plant. and Equipment 30. and equipment and design further audit procedures. including tests of controls and substantive procedures. Examination of corporate minutes and resolutions concerning the approval to acquire property. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement AICPA FN: Risk Analysis Bloom's: Understand Difficulty: Medium Learning Objective: 13-06 Assess the risks of material misstatement of property. B. Plant. and Equipment 13-23 . Discussing capitalization policies with Lowell's controller. Source: AICPA Topic: Audit of Property. Examination of correspondence with the corporate counsel concerning acquisition matters. D. Examination of ownership documents registered and on file at a public hall of records.

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement AICPA FN: Risk Analysis Bloom's: Apply Difficulty: Hard Learning Objective: 13-06 Assess the risks of material misstatement of property. Plant. Source: AICPA Topic: Depreciation 32. Analysis of the debits to the accumulated depreciation account. Review of depreciation. Review of insurance policy riders. D. to address the risks. including tests of controls and substantive procedures. Review of the purchase returns and allowances account. and equipment and design further audit procedures. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Understand Difficulty: Medium Learning Objective: 13-07 Explain the auditors' approach to the audit of depreciation. C. B. Reconcile the amount of depreciation expense to those amounts credited to accumulated depreciation accounts. D. C.Property. Source: AICPA Topic: Audit of Property. Establish the basis for depreciable assets and verify the depreciation expense. and Equipment: Depreciation and Depletion 31. and Equipment 13-24 . Plant. The auditors are least likely to learn of retirements of equipment through which of the following? A. plant. Which of the following best describes the independent auditors' approach to obtaining satisfaction concerning depreciation expense in the income statement? A.Chapter 13 . 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.

D. Plant. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement AICPA FN: Risk Analysis Bloom's: Understand Difficulty: Medium Learning Objective: 13-06 Assess the risks of material misstatement of property. to address the risks. plant. Source: AICPA Topic: Property. Using a budget to forecast and control acquisitions and retirements. C. plant. C. and Equipment 34. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Understand Difficulty: Medium Learning Objective: 13-03 Explain the fundamental controls over property. Which of the following is the most important control procedure over acquisitions of property. plant. including tests of controls and substantive procedures. Establishing a written company policy distinguishing between capital and revenue expenditures. Plant. Analyzing monthly variances between authorized expenditures and actual costs. Sales. B.Chapter 13 . Plant. and equipment. and equipment and design further audit procedures. Repairs and maintenance expense. For which of the following ledger accounts would the auditor be most likely to analyze the details to identify understatements of equipment acquisitions? A. Sales salaries expense. and Equipment: Depreciation and Depletion 33. D. Service Revenue. and equipment? A. and Equipment 13-25 . Source: AICPA Topic: Audit of Property. Requiring acquisitions to be made by user departments. B.Property.

Plant. Source: AICPA Topic: Audit of Property. Extent of the control risk. including tests of controls and substantive procedures. to address the risks. D. C. Adequacy of replacement funds. Review and approval of the monthly depreciation entry by the plant supervisor. including tests of controls and substantive procedures. plant. the auditor tries to determine all of the following except the: A. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement AICPA FN: Risk Analysis Bloom's: Remember Difficulty: Easy Learning Objective: 13-06 Assess the risks of material misstatement of property. Plant. D. and equipment and design further audit procedures.Property. plant. Reasonableness of the depreciation. to address the risks.Chapter 13 . and equipment and design further audit procedures. Examination by the internal auditors of vendor invoices and canceled checks for property acquisitions. C. Extent of property abandoned during the year. Investigation of variances within a formal budgeting system. and equipment. Plant. plant. B. Segregation of duties of employees in the accounts payable department. and Equipment 36. and Equipment: Depreciation and Depletion 35. B. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement AICPA FN: Risk Analysis Bloom's: Understand Difficulty: Medium Learning Objective: 13-06 Assess the risks of material misstatement of property. and Equipment 13-26 . Property acquisitions that are misclassified as maintenance expense would most likely be detected by an internal control system that provides for: A. In the examination of property. Source: AICPA Topic: Audit of Property.

Plant. Bill Jones. a staff member on the audit. Plant. and Equipment: Depreciation and Depletion Essay Questions 37. and equipment. He has indicated to you that he believes the following items should not be capitalized. During the audit of Zing Company.Property. Indicate with an "X" whether you believe the item should be capitalized or expensed. and equipment. plant. identified a number of items that have been included as additions to property. Topic: Property. and Equipment 13-27 . AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Understand Difficulty: Medium Learning Objective: 13-03 Explain the fundamental controls over property.Chapter 13 . plant.

and Equipment: Depreciation and Depletion 38. such as inventories and accounts receivable. a company should still endeavor to maintain effective internal control over plant and equipment. The principal purpose of internal controls relating to plant and equipment is to obtain maximum efficiency from the dollars invested in plant assets.  A policy requiring all purchases of plant and equipment through normal purchasing and receiving procedures. b.Chapter 13 . Topic: Property. plant.  A written statement of company policy distinguishing between capital and revenue expenditures. including serially numbered retirement work orders. and Equipment 13-28 . a. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Apply Difficulty: Hard Learning Objective: 13-03 Explain the fundamental controls over property. Plant and equipment are not as inherently risky as are other assets. Describe the principal purpose of internal controls relating to plant and equipment. List and describe four major controls applicable to plant and equipment. The following are major internal controls for plant and equipment (only four required):  Use of a plant budget to forecast and control acquisitions and retirements.Property.  Periodic physical inventories. However. Plant. b. a.  A system of retirement procedures.  Maintaining subsidiary ledger of property.  Establishing a system of authorizations for acquisitions. and equipment. Plant.

Describe two ways that the auditors obtain evidence that there are no significant amounts of unrecorded retirements of property (land).  Inquire of executives and supervisors. and Equipment: Depreciation and Depletion 39. investigate related retirements. b. The auditors obtain evidence that there are no significant amounts of unrecorded retirements of equipment by (only three required):  For major purchases.  Examination of payments to mortgagee or trustee. Topic: Audit of Property.  Vouching rent receipts from lessees.Property. and equipment and design further audit procedures.  Analyze the Miscellaneous Revenue account to locate cash proceeds from sale of equipment. Plant.Chapter 13 . plant.  Investigate reductions in insurance coverage. Describe three ways that the auditors obtain evidence that there are no significant amounts of unrecorded retirements of equipment. b. a. to address the risks. a. investigate related retirements. including tests of controls and substantive procedures. and Equipment 13-29 . The auditors obtain evidence that there are no significant amounts of unrecorded retirements of property by (only two required):  Examination of property tax bills. plant and equipment.  For discontinued operations. Auditors should obtain evidence that there are no significant amounts of unrecorded retirements of property. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement AICPA FN: Risk Analysis Bloom's: Apply Difficulty: Hard Learning Objective: 13-06 Assess the risks of material misstatement of property. Plant.