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    Audt.ppe&depletion Audt.ppe&depletion Document Transcript

    • Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion Chapter 13 Property, Plant, and Equipment: Depreciation and DepletionTrue / False Questions1. The auditors approach to the audit of property, plant and equipment largely results fromthe fact that relatively few transactions occur.True False2. A major control procedure related to plant and equipment is a budget for depreciation.True False3. Evidence of continued ownership of property is obtained by vouching payments to amortgage trustee.True False4. The auditors typically observe all major items of property, plant and equipment every year.True False5. Material purchases of assets from an affiliated company should be disclosed in the financialstatements.True False6. Idle equipment will generally need to be reclassified as a current asset.True False7. The primary purpose of internal control over plant and equipment is to safeguard the assetsfrom theft.True False 13-1
    • Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion8. A typical procedure in the audit of property is examination of public records to verify theownership of the property.True False9. 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 False10. In the audit of depletion the auditors must often rely on the work of specialists.True FalseMultiple Choice Questions11. 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 years 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 themduring the plant tour.B. Compare depreciation expense with the prior years 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. A plant manager would be most likely to provide information on which of the following?A. Adequacy of the provision for uncollectible accounts.B. Appropriateness of physical inventory valuation techniques.C. Existence of obsolete inventory.D. Deferral of certain purchases of office supplies. 13-2
    • Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion14. Which of the following would be least likely to address control over the initiation andexecution of equipment transactions?A. Requests for major repairs are approved by a higher level than the department initiating therequest.B. Prenumbered purchase orders are used for equipment and periodically accounted for.C. Requests for purchases of equipment are reviewed for consideration of solicitingcompetitive bids.D. Procedures exist to restrict access to equipment.15. When there are numerous property and equipment transactions during the year, an auditorwho plans to assess control risk at a low level usually performs:A. Tests of controls and extensive tests of property and equipment balances at the end of theyear.B. Analytical procedures for current year property and equipment transactions.C. Tests of controls and limited tests of current year property and equipment transactions.D. Analytical procedures for property and equipment balances at the end of the year.16. Which of the following best describes the auditors approach to the audit of the endingbalance of property, plant and equipment for a continuing nonpublic client?A. Direct audit of the ending balance.B. Agreement of the beginning balance to prior years working papers and audit of significantchanges in the accounts.C. Audit of changes in the accounts since inception of the company.D. Audit of selected purchases and retirements for the last few years.17. Which of the following is not a control that should be established for purchases ofequipment?A. Establishing a budget for capital acquisitions.B. Requiring that the department in need of the equipment order the equipment.C. Requiring that the receiving department receive the equipment.D. Establishing an accounting policy regarding the minimum dollar amount of purchase thatwill be considered for capitalization. 13-3
    • Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion18. Which of the following is not one of the auditors objectives in auditing depreciation?A. Establishing the reasonableness of the clients replacement policy.B. Establishing that the methods used are appropriate.C. Establishing that the methods are consistently applied.D. Establishing the reasonableness of depreciation computations.19. Which of the following is the best evidence of continuous ownership of property?A. Examination of the deed.B. Examination of rent receipts from lessees of the property.C. Examination of the title policy.D. Examination of canceled check in payment for the property.20. Which of the following best describes the auditors typical observation of plant andequipment?A. The auditors observe a physical inventory of plant and equipment, annually.B. The auditors observe all additions to plant and equipment made during the year.C. The auditors observe all major plant and equipment items in the clients accounts eachyear.D. The auditors observe major additions to plant and equipment made during the year.21. Which of the following is used to obtain evidence that the clients equipment accounts arenot understated?A. Analyzing repairs and maintenance expense accounts.B. Vouching purchases of plant and equipment.C. Recomputing depreciation expense.D. Analyzing the miscellaneous revenue account.22. Which of the following is not a test primarily used to test property, plant and equipmentaccounts for overstatement?A. Investigation of reductions in insurance coverage.B. Review of property tax bills.C. Examination of retirement work orders prepared during the year.D. Vouching retirements of plant and equipment. 13-4
    • Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion23. A continuing audit clients property, plant and equipment and accounts receivableaccounts have approximately the same year-end balance. In this circumstance, whencompared to property, plant and equipment one would normally expect the audit of accountsreceivable to require:A. More audit time.B. Less audit time.C. Approximately the same amount of audit time.D. Similar confirmation procedures.24. When comparing an initial audit with a subsequent year audit for a particular client, thescope of audit procedures for which of the following accounts would be expected to decreasethe most?A. Accounts receivable.B. Cash.C. Marketable securities.D. Property, plant and equipment.25. When performing an audit of the property, plant and equipment accounts, an auditorshould expect which of the following to be most likely to indicate a departure from generallyaccepted accounting principles?A. Repairs have been capitalized to repair equipment that had broken down.B. Interest has been capitalized for self-constructed assets.C. Assets have been acquired from affiliated corporations with the related transactionsrecorded and described in the financial statements.D. The cost of freight-in on an acquisition has been capitalized.26. The most likely technique for the current year audit of goodwill which was acquired threeyears ago by a continuing audit client:A. Confirmation.B. Observation.C. Recomputation.D. Inquiry. 13-5
    • Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion27. For which of the following accounts is it most likely that most of the audit work can beperformed in advance of the balance sheet date?A. Accounts receivable.B. Cash.C. Current marketable securities.D. Property, plant and equipment.28. The auditors may expect a proper debit to goodwill due to:A. Purchase of a trademark.B. Establishment of an extraordinarily profitable product.C. A business combination.D. Capitalization of human resources.29. Which of the following is a customary audit procedure for the verification of the legalownership 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 acquireproperty, plant and equipment.D. Examination of deeds and title guaranty policies on hand.30. In violation of company policy, Lowell Company erroneously capitalized the cost ofpainting its warehouse. The auditors examining Lowells financial statements would mostlikely detect this when:A. Discussing capitalization policies with Lowells controller.B. Examining maintenance expense accounts.C. Observing, during the physical inventory observation, that the warehouse had been painted.D. Examining the construction work orders supporting items capitalized during the year. 13-6
    • Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion31. Which of the following best describes the independent auditors approach to obtainingsatisfaction concerning depreciation expense in the income statement?A. Verify the mathematical accuracy of the amounts charged to income as a result ofdepreciation expense.B. Determine the method for computing depreciation expense and ascertain that is inaccordance with generally accepted accounting principles.C. Reconcile the amount of depreciation expense to those amounts credited to accumulateddepreciation accounts.D. Establish the basis for depreciable assets and verify the depreciation expense.32. The auditors are least likely to learn of retirements of equipment through which of thefollowing?A. Review of the purchase returns and allowances account.B. Review of depreciation.C. Analysis of the debits to the accumulated depreciation account.D. Review of insurance policy riders.33. For which of the following ledger accounts would the auditor be most likely to analyze thedetails to identify understatements of equipment acquisitions?A. Service Revenue.B. Sales.C. Repairs and maintenance expense.D. Sales salaries expense.34. Which of the following is the most important control procedure over acquisitions ofproperty, plant, and equipment?A. Establishing a written company policy distinguishing between capital and revenueexpenditures.B. Using a budget to forecast and control acquisitions and retirements.C. Analyzing monthly variances between authorized expenditures and actual costs.D. Requiring acquisitions to be made by user departments. 13-7
    • Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion35. In the examination of property, plant, and equipment, the auditor tries to determine all ofthe following except the:A. Extent of the control risk.B. Extent of property abandoned during the year.C. Adequacy of replacement funds.D. Reasonableness of the depreciation.36. Property acquisitions that are misclassified as maintenance expense would most likely bedetected by an internal control system that provides for:A. Investigation of variances within a formal budgeting system.B. Review and approval of the monthly depreciation entry by the plant supervisor.C. Segregation of duties of employees in the accounts payable department.D. Examination by the internal auditors of vendor invoices and canceled checks for propertyacquisitions.Essay Questions37. Plant and equipment are not as inherently risky as are other assets, such as inventories andaccounts receivable. However, a company should still endeavor to maintain effective internalcontrol over plant and equipment.a. Describe the principal purpose of internal controls relating to plant and equipment.b. List and describe four major controls applicable to plant and equipment. 13-8
    • Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion38. Auditors should obtain evidence that there are no significant amounts of unrecordedretirements of property, plant and equipment.a. Describe two ways that the auditors obtain evidence that there are no significant amounts ofunrecorded retirements of property (land).b. Describe three ways that the auditors obtain evidence that there are no significant amountsof unrecorded retirements of equipment. 13-9
    • Chapter 13 - Property, Plant, and Equipment: Depreciation and DepletionChapter 13 Property, Plant, and Equipment: Depreciation and Depletion AnswerKeyTrue / False Questions1. The auditors approach to the audit of property, plant and equipment largely results fromthe fact that relatively few transactions occur.TRUEDifficulty: Easy2. A major control procedure related to plant and equipment is a budget for depreciation.FALSEDifficulty: Medium3. Evidence of continued ownership of property is obtained by vouching payments to amortgage trustee.TRUEDifficulty: Medium4. The auditors typically observe all major items of property, plant and equipment every year.FALSEDifficulty: Medium 13-10
    • Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion5. Material purchases of assets from an affiliated company should be disclosed in the financialstatements.TRUEDifficulty: Easy6. Idle equipment will generally need to be reclassified as a current asset.FALSEDifficulty: Easy7. The primary purpose of internal control over plant and equipment is to safeguard the assetsfrom theft.FALSEDifficulty: Medium8. A typical procedure in the audit of property is examination of public records to verify theownership of the property.FALSEDifficulty: Hard9. 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.TRUEDifficulty: Hard10. In the audit of depletion the auditors must often rely on the work of specialists.TRUEDifficulty: Medium 13-11
    • Chapter 13 - Property, Plant, and Equipment: Depreciation and DepletionMultiple Choice Questions11. 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 years deprecation expense was erroneously understated.D. Overhead allocations were revised at year-end.Difficulty: Hard12. In testing for unrecorded retirements of equipment, an auditor might.A. Select items of equipment from the accounting records and then attempt to locate themduring the plant tour.B. Compare depreciation expense with the prior years 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.Difficulty: Medium13. A plant manager would be most likely to provide information on which of the following?A. Adequacy of the provision for uncollectible accounts.B. Appropriateness of physical inventory valuation techniques.C. Existence of obsolete inventory.D. Deferral of certain purchases of office supplies.Difficulty: Medium 13-12
    • Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion14. Which of the following would be least likely to address control over the initiation andexecution of equipment transactions?A. Requests for major repairs are approved by a higher level than the department initiating therequest.B. Prenumbered purchase orders are used for equipment and periodically accounted for.C. Requests for purchases of equipment are reviewed for consideration of solicitingcompetitive bids.D. Procedures exist to restrict access to equipment.Difficulty: Hard15. When there are numerous property and equipment transactions during the year, an auditorwho plans to assess control risk at a low level usually performs:A. Tests of controls and extensive tests of property and equipment balances at the end of theyear.B. Analytical procedures for current year property and equipment transactions.C. Tests of controls and limited tests of current year property and equipment transactions.D. Analytical procedures for property and equipment balances at the end of the year.Difficulty: Hard16. Which of the following best describes the auditors approach to the audit of the endingbalance of property, plant and equipment for a continuing nonpublic client?A. Direct audit of the ending balance.B. Agreement of the beginning balance to prior years working papers and audit of significantchanges in the accounts.C. Audit of changes in the accounts since inception of the company.D. Audit of selected purchases and retirements for the last few years.Difficulty: Medium 13-13
    • Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion17. Which of the following is not a control that should be established for purchases ofequipment?A. Establishing a budget for capital acquisitions.B. Requiring that the department in need of the equipment order the equipment.C. Requiring that the receiving department receive the equipment.D. Establishing an accounting policy regarding the minimum dollar amount of purchase thatwill be considered for capitalization.Difficulty: Medium18. Which of the following is not one of the auditors objectives in auditing depreciation?A. Establishing the reasonableness of the clients replacement policy.B. Establishing that the methods used are appropriate.C. Establishing that the methods are consistently applied.D. Establishing the reasonableness of depreciation computations.Difficulty: Easy19. Which of the following is the best evidence of continuous ownership of property?A. Examination of the deed.B. Examination of rent receipts from lessees of the property.C. Examination of the title policy.D. Examination of canceled check in payment for the property.Difficulty: Hard20. Which of the following best describes the auditors typical observation of plant andequipment?A. The auditors observe a physical inventory of plant and equipment, annually.B. The auditors observe all additions to plant and equipment made during the year.C. The auditors observe all major plant and equipment items in the clients accounts eachyear.D. The auditors observe major additions to plant and equipment made during the year.Difficulty: Medium 13-14
    • Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion21. Which of the following is used to obtain evidence that the clients equipment accounts arenot understated?A. Analyzing repairs and maintenance expense accounts.B. Vouching purchases of plant and equipment.C. Recomputing depreciation expense.D. Analyzing the miscellaneous revenue account.Difficulty: Hard22. Which of the following is not a test primarily used to test property, plant and equipmentaccounts for overstatement?A. Investigation of reductions in insurance coverage.B. Review of property tax bills.C. Examination of retirement work orders prepared during the year.D. Vouching retirements of plant and equipment.Difficulty: Hard23. A continuing audit clients property, plant and equipment and accounts receivableaccounts have approximately the same year-end balance. In this circumstance, whencompared to property, plant and equipment one would normally expect the audit of accountsreceivable to require:A. More audit time.B. Less audit time.C. Approximately the same amount of audit time.D. Similar confirmation procedures.Difficulty: Medium 13-15
    • Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion24. When comparing an initial audit with a subsequent year audit for a particular client, thescope of audit procedures for which of the following accounts would be expected to decreasethe most?A. Accounts receivable.B. Cash.C. Marketable securities.D. Property, plant and equipment.Difficulty: Medium25. When performing an audit of the property, plant and equipment accounts, an auditorshould expect which of the following to be most likely to indicate a departure from generallyaccepted accounting principles?A. Repairs have been capitalized to repair equipment that had broken down.B. Interest has been capitalized for self-constructed assets.C. Assets have been acquired from affiliated corporations with the related transactionsrecorded and described in the financial statements.D. The cost of freight-in on an acquisition has been capitalized.Difficulty: Medium26. The most likely technique for the current year audit of goodwill which was acquired threeyears ago by a continuing audit client:A. Confirmation.B. Observation.C. Recomputation.D. Inquiry.Difficulty: Medium 13-16
    • Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion27. For which of the following accounts is it most likely that most of the audit work can beperformed in advance of the balance sheet date?A. Accounts receivable.B. Cash.C. Current marketable securities.D. Property, plant and equipment.Difficulty: Medium28. The auditors may expect a proper debit to goodwill due to:A. Purchase of a trademark.B. Establishment of an extraordinarily profitable product.C. A business combination.D. Capitalization of human resources.Difficulty: Medium29. Which of the following is a customary audit procedure for the verification of the legalownership 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 acquireproperty, plant and equipment.D. Examination of deeds and title guaranty policies on hand.Difficulty: MediumSource: AICPA30. In violation of company policy, Lowell Company erroneously capitalized the cost ofpainting its warehouse. The auditors examining Lowells financial statements would mostlikely detect this when:A. Discussing capitalization policies with Lowells controller.B. Examining maintenance expense accounts.C. Observing, during the physical inventory observation, that the warehouse had been painted.D. Examining the construction work orders supporting items capitalized during the year.Difficulty: MediumSource: AICPA 13-17
    • Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion31. Which of the following best describes the independent auditors approach to obtainingsatisfaction concerning depreciation expense in the income statement?A. Verify the mathematical accuracy of the amounts charged to income as a result ofdepreciation expense.B. Determine the method for computing depreciation expense and ascertain that is inaccordance with generally accepted accounting principles.C. Reconcile the amount of depreciation expense to those amounts credited to accumulateddepreciation accounts.D. Establish the basis for depreciable assets and verify the depreciation expense.Difficulty: MediumSource: AICPA32. The auditors are least likely to learn of retirements of equipment through which of thefollowing?A. Review of the purchase returns and allowances account.B. Review of depreciation.C. Analysis of the debits to the accumulated depreciation account.D. Review of insurance policy riders.Difficulty: HardSource: AICPA33. For which of the following ledger accounts would the auditor be most likely to analyze thedetails to identify understatements of equipment acquisitions?A. Service Revenue.B. Sales.C. Repairs and maintenance expense.D. Sales salaries expense.Difficulty: MediumSource: AICPA 13-18
    • Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion34. Which of the following is the most important control procedure over acquisitions ofproperty, plant, and equipment?A. Establishing a written company policy distinguishing between capital and revenueexpenditures.B. Using a budget to forecast and control acquisitions and retirements.C. Analyzing monthly variances between authorized expenditures and actual costs.D. Requiring acquisitions to be made by user departments.Difficulty: MediumSource: AICPA35. In the examination of property, plant, and equipment, the auditor tries to determine all ofthe following except the:A. Extent of the control risk.B. Extent of property abandoned during the year.C. Adequacy of replacement funds.D. Reasonableness of the depreciation.Difficulty: EasySource: AICPA36. Property acquisitions that are misclassified as maintenance expense would most likely bedetected by an internal control system that provides for:A. Investigation of variances within a formal budgeting system.B. Review and approval of the monthly depreciation entry by the plant supervisor.C. Segregation of duties of employees in the accounts payable department.D. Examination by the internal auditors of vendor invoices and canceled checks for propertyacquisitions.Difficulty: MediumSource: AICPA 13-19
    • Chapter 13 - Property, Plant, and Equipment: Depreciation and DepletionEssay Questions37. Plant and equipment are not as inherently risky as are other assets, such as inventories andaccounts receivable. However, a company should still endeavor to maintain effective internalcontrol over plant and equipment.a. Describe the principal purpose of internal controls relating to plant and equipment.b. List and describe four major controls applicable to plant and equipment.a. The principal purpose of internal controls relating to plant and equipment is to obtainmaximum efficiency from the dollars invested in plant assets.b. 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.• Maintaining subsidiary ledger of property.• Establishing a system of authorizations for acquisitions.• A written statement of company policy distinguishing between capital and revenueexpenditures.• A policy requiring all purchases of plant and equipment through normal purchasing andreceiving procedures.• Periodic physical inventories.• A system of retirement procedures, including serially numbered retirement work orders.Difficulty: Hard 13-20
    • Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion38. Auditors should obtain evidence that there are no significant amounts of unrecordedretirements of property, plant and equipment.a. Describe two ways that the auditors obtain evidence that there are no significant amounts ofunrecorded retirements of property (land).b. Describe three ways that the auditors obtain evidence that there are no significant amountsof unrecorded retirements of equipment.a. The auditors obtain evidence that there are no significant amounts of unrecordedretirements of property by (only two required):• Examination of property tax bills.• Vouching rent receipts from lessees.• Examination of payments to mortgagee or trustee.b. The auditors obtain evidence that there are no significant amounts of unrecordedretirements of equipment by (only three required):• For major purchases, investigate related retirements.• Analyze the Miscellaneous Revenue account to locate cash proceeds from sale ofequipment.• For discontinued operations, investigate related retirements.• Inquire of executives and supervisors.• Investigate reductions in insurance coverage.Difficulty: Hard 13-21