Deck 19: Completing the Tests in the Acquisition and Payment Cycle: Verification of Selected Accounts

Question 1

Which of the following would generally not be a component of the audit of the acquisition and payment cycle?

A) adequacy of controls over acquisitions of long-lived assets
B) tracing disposals of long-lived assets to the fixed asset master file
C) determining the adequacy of the funds available for capital expenditures
D) reperformance of recorded depreciation expense

Answer 1

C

Question 2

The types of assets, expenses, and liabilities associated with the acquisition and payment cycle will differ by company.

Answer 2

True

Question 3

You are auditing Manufacturing Company and testing the audit related objective of completeness for the equipment accounts. Which of the following audit procedures is most likely to achieve your objective?

A) Examine vendor invoices and receiving reports.
B) Physically examine assets.
C) Examine vendor invoices of closely related accounts such as repairs and maintenance.
D) Trace individual acquisitions to the fixed asset master file.

Answer 3

C

Question 4

The source of debits in the equipment account is the

A) sales schedule.
B) cash disbursements journal.
C) cash receipts journal.
D) acquisitions schedule.

Question 5

The billing of customers and collection of the related accounts receivable are normally considered to be associated with the acquisition and payment cycle.

Question 6

Which of the following accounts is not associated with the acquisition and payment cycle?

A) common stock
B) property, plant and equipment
C) accrued property taxes
D) income tax expense

Question 7

Normally it may be unnecessary to examine supporting documentation for each addition to property, plant, and equipment, but it would be customary to verify

A) all large transactions.
B) all unusual transactions.
C) a representative sample of typical additions.
D) all of the above.

Question 8

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) estimated liability for warranties
D) property tax expense

Question 9

You are auditing the acquisition and payment cycle and note the presence of excessive recurring losses on retired assets. You may conclude that

A) insured values are greater than book values.
B) there are a large number of fully depreciated assets.
C) depreciation charges may by insufficient.
D) the company has a policy of selling relatively new assets.

Question 10

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

Question 11

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

A) footing the schedule
B) tracing the totals on the schedule to the recorded disposals in the general ledger
C) tracing cost and accumulated depreciation of the disposals to the property master file
D) All of the above are necessary.

Question 12

Which of the following statements about the audit of fixed assets is the least 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 are fully depreciated.

Question 13

Which of the following audit procedures would be the most correct in determining the audit objective of existence for the equipment account in the fixed asset master file?

A) Examine vendor invoices and receiving reports.
B) Review transactions near the balance sheet date.
C) Recalculate vendor invoices.
D) Examine vendor invoices for correct accounting treatment.

Question 14

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.

Question 15

Other accrued expenses are normally considered to be associated with the acquisition and payment cycle.

Question 16

Which is not one of the tests that would be used in the audit of equipment, depreciation expense, and accumulated depreciation?

A) Verify the ending balance in the asset account.
B) Send confirmations to the sales personnel who sold the equipment to the company.
C) Perform substantive analytical procedures.
D) Verify current year acquisitions.

Question 17

Which of the following is a substantive analytical procedure to determine if there is idle equipment or equipment that was disposed of but not written off?

A) Compare depreciation expense divided by gross equipment cost with previous years.
B) Compare gross manufacturing cost divided by some measure of production with previous years.
C) Compare accumulated depreciation divided by gross equipment cost with previous years.
D) Compare annual repairs and maintenance accounts with previous years.

Question 18

Failure to capitalize a fixed asset at the correct amount would impact which financial statements?

A) the balance sheet
B) the income statement
C) the cash flow statement only
D) both the income statement and the balance sheet

Question 19

You are the in-charge auditor for a company who has been an audit client for several years. 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 the equipment account

Question 20

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

A)
B)
C)
D)

Question 21

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.

Question 22

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 policies.
D) cost of the fixed asset and useful lives.

Question 23

The most common audit test to verify equipment additions is to

A) examine vendors' invoices.
B) perform an inventory of the fixed assets.
C) confirm the additions with the vendors.
D) trace the vendor invoices to the cash disbursements journal.

Question 24

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.

Question 25

The auditor is examining the accounting entries made to the accumulated depreciation account during the year and notices a significant number and amounts of debits to the account. Which of the following provides the most logical explanation?

A) large number of asset retirements
B) salvage values were revised downward
C) useful lives were revised downward
D) allocation of fixed overhead was revised

Question 26

In determining the reasonableness of the client's amount for depreciation expense the auditor is primarily concerned that the client has followed a consistent policy and the calculations are correct. Which of the following audit objectives best addresses the above concerns?

A) existence
B) accuracy
C) valuation
D) allocation

Question 27

The auditor normally does not need to test the accuracy or classification of fixed assets recorded in prior periods if they are the continuing auditor 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.

Question 28

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

A) Read the terms of loan and credit agreements.
B) Send loan confirmation requests to banks and other lending institutions.
C) Have discussions with the client or send letters to legal counsel.
D) All of the above may be used to identify legal encumbrances.

Question 29

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.

Question 30

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, property taxes, or insurance coverage.

Question 31

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.

Question 32

Improperly classifying a fixed asset by recording the amount in the repairs and maintenance expense account will have an effect on which of the following financial statements until the asset would normally have been depreciated?

A) the balance sheet
B) the income statement
C) the cash flow statement
D) both the income statement and the balance sheet

Question 33

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) completeness.
B) detail tie-in.
C) cutoff.
D) existence.

Question 34

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 schedule.
B) depreciation schedule.
C) fixed asset master file.
D) file of purchase requisitions.

Question 35

In testing acquisitions the auditor needs to understand the appropriate accounting guidance related to acquisition accounting. Which of the following is not an accounting consideration for the auditor as regards to acquisition cost?

A) inclusion of material transportation and installation costs
B) recording of trade-in costs
C) allocating costs when building and equipment are purchased at one price
D) verifying that purchased equipment amounts correspond to the budgeted amount

Question 36

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

Question 37

The auditor is testing for unrecorded retirements/disposals of equipment. Which of the following audit procedures would the auditor most likely use?

A) Select items from the fixed asset master file and then physically locate them.
B) Examine the repairs and maintenance amount for large debits.
C) Compare current year's depreciation expense with the previous year's depreciation expense.
D) Trace acquisition documents to the fixed asset master file.

Question 38

The auditor needs to gain reasonable assurance that the equipment accounts in the fixed asset master file are not understated. Which of the following accounts would most likely be reviewed in making that determination?

A) depreciation expense
B) repairs and maintenance expense
C) gains/losses on sales and retirements
D) cash

Question 39

When the auditor is determining whether the client followed a consistent depreciation policy from period to period, and the client's depreciation calculations are correct, the balance-related audit objective of ________ is being determined for depreciation expense.

A) completeness
B) existence
C) classification
D) accuracy

Question 40

When performing the test of details of balances, the balance-related audit objective of classifications is closely related to the objective of

A) accuracy.
B) detail tie-in.
C) existence.
D) completeness.

Question 41

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

Question 42

Auditors verify and emphasize current additions of equipment. Which of the following is not a reason for this verification and emphasis?

A) The amount of any given acquisition is often material.
B) The equipment is likely to be kept and maintained in the accounting records for several years.
C) There are usually fewer current period acquisitions of equipment, especially large equipment used in manufacturing.
D) The balance carried forward in the equipment account from the previous year is important.

Question 43

The primary characteristic that distinguishes property, plant, and equipment from inventory, prepaid expenses, and investments is the intention to use property, plant, and equipment as a part of the operations of the client's business over their expected life.

Question 44

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

Question 45

Completeness and existence are the auditor's primary objectives in auditing manufacturing equipment.

Question 46

The auditor's tests for proper cutoff of current year acquisitions of property, plant, and equipment are usually done as part of accounts payable cutoff tests.

Question 47

Depreciation expense is normally verified as a part of tests of details of balances rather than as part of tests of controls or substantive tests of transactions.

Question 48

One of the primary objectives in examining the repairs and maintenance accounts is to obtain evidence that

A) expenditures of equipment have not been charged to expense.
B) the actual amount recorded is the same as the budgeted amount.
C) expenditures for equipment have been recorded in the proper period.
D) revenue expenditures made on behalf of equipment have been recorded in the proper period.

Question 49

The company's choices for determining the fixed asset's useful life and residual value impact the amount of depreciation recorded.

Question 50

The auditor's main objectives in the verification of the sale, trade-in, or abandonment of equipment are to gather sufficient appropriate evidence that all disposals are ________ and at the ________.

A) verified; historical cost
B) recorded; correct amounts
C) accurate; proper gain or loss amount
D) classified properly; net realizable value

Question 51

Which of the following information would not be included, generally, in a fixed asset master file for a piece of equipment?

A) disposal of the equipment during the year
B) copy of the supplier's sales proposal for the equipment
C) date of acquisition of the equipment
D) accumulated depreciation for the equipment

Question 52

The most important audit objective for depreciation expense is detail tie-in.

Question 53

Which of the following is not one of the reasons auditors verify equipment differently from current asset accounts?

A) There are usually fewer current period acquisitions of equipment.
B) The amount of any given acquisition is often material.
C) The equipment is likely to be kept and maintained in the accounting records for several years.
D) Current assets are subject to liens and encumbrances while equipment is not.

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.

Question 55

The audit procedure "foot the schedule of fixed assets acquisitions and trace the total to the general ledger" relates most closely to the completeness objective for fixed assets acquisitions.

Question 56

One of the auditor's primary objectives when auditing manufacturing equipment is completeness.

Question 57

One of the reasons that auditors verify equipment differently from current assets is the amount of any given equipment acquisition is often material.

Question 58

The transportation and installation costs for a piece of equipment should be charged to an expense account.

Question 59

Depreciation amounts are determined by exchange transactions with outside parties.

Question 60

The starting point for the verification of current-year acquisitions of property, plant, and equipment is normally a client-prepared schedule of all acquisitions recorded in the general ledger during the year.

Question 61

Using audit software to foot the equipment master file and agreeing the master file total to the general ledger is generally sufficient when verifying the ending balance of the equipment account.

Question 62

A balance-related audit objective in property, plant, and equipment includes the proper classification of these assets on the balance sheets. The auditor should therefore examine vendors' invoices in various property, plant, and equipment accounts to ensure that such invoices are classified, properly, as building, manufacturing, office equipment, or repairs.

Question 63

In the audit of equipment and related accounts, verifying that the ending balances are properly classified and are adequately disclosed in the financial statements is one of the tests the auditor must perform.

Question 64

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

Question 65

The auditor can rely on the combination of management's estimates of fair value estimates and any associated impairment write downs that result to long-lived assets, when required, combined with the opinion of the specialist hired by management in auditing management's estimates and write downs.

Question 66

Generally, in most situations, the audits of property, plant, and equipment accounts are similar.

Question 67

Equipment additions which are infrequent in occurrence and large in dollar amounts, which were included as part of the tests of the acquisition and payment cycle, allow the auditor to rely heavily on the results of such tests.

Question 68

A long-lived asset that is classified as held for sale is measured at the lower of the carrying value or fair value less the cost to sell, and should be presented, separately, in the financial statements if material.

Question 69

If management hires a specialist to estimate the fair value of a long-lived asset, the auditor should take appropriate steps as required by auditing standards in evaluating the work of the specialist

Question 70

The approach to auditing patents and copyrights is similar to that used for property, plant, and equipment accounts.

Question 71

Equipment on hand which is no longer used in operations but which the auditor has physically verified as being in existence does not need to be evaluated for potential impairment.

Question 72

The auditor's knowledge of the client's business is important when auditing management's judgements in evaluating whether a long-lived asset is impaired or not, including estimating fair value of these assets.

Question 73

Recording an acquisition of a fixed asset at an improper amount affects the balance sheet until the company disposes of the asset, but the income statement is not affected.

Question 74

Ordinarily, if you are auditing a continuing client, it is unnecessary to test the accuracy objective or the classification objective for fixed assets acquired in prior years.

Question 75

When auditing acquisitions of property, plant, and equipment, the auditor's review of lease and rental agreements most closely relate to the cutoff objective.

Question 76

The intent to use property, plant, and equipment as part of the operations of a client's business is a significant characteristic that differentiates these assets from other assets like inventory and prepaid expenses.

Question 77

Auditors needs to examine purchase and/or lease contracts entered into related to property, plant, and equipment, to determine if capitalization of the property, plant, and equipment is appropriate or not.

Question 78

Performance materiality is important for verifying current year additions because these transactions have consistent dollar amounts from year to year.

Question 79

In the audit of property, plant, and equipment, auditors need to examine if the client has the right to record these assets as assets on the balance sheet. The auditor needs to examine any lease agreements associated with these assets to determine if the lease qualifies as a finance or an operating lease.

Question 80

Property, plant, and equipment are assets that have expected lives of less than one year, are used in the business, and are not acquired for resale.