Chapter 13 Property, Plant, and Equipment: Depreciation and
Depletion
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.TrueFalse
2.A major control procedure related to plant and equipment is a
budget for depreciation.TrueFalse
3.Evidence of continued ownership of property is obtained by
vouching payments to a mortgage trustee.TrueFalse
4.The auditors typically observe all major items of property,
plant, and equipment every year.TrueFalse
5.Material purchases of assets from an affiliated company should
be disclosed in the financial statements.TrueFalse
6.Idle equipment will generally need to be reclassified as a
current asset.TrueFalse
7.The primary purpose of internal control over plant and
equipment is to safeguard the assets from theft.TrueFalse
8.A typical procedure in the audit of property is examination of
public records to verify the ownership of the
property.TrueFalse
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.TrueFalse
10.In the audit of depletion the auditors must often rely on the
work of specialists.TrueFalse
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.A plant manager would be most likely to provide information
on which of the following?A.Adequacy of the provision for
uncollectible accounts.B.Appropriateness of physical inventory
valuation techniques.C.Existence of obsolete production
equipment.D.Deferral of certain purchases of office supplies.
14.Which of the following would be least likely to address
control over the initiation and execution of equipment
transactions?A.Requests for major repairs are approved by a higher
level than the department initiating the request.B.Prenumbered
purchase orders are used for equipment and periodically accounted
for.C.Requests for purchases of equipment are reviewed for
consideration of soliciting competitive bids.D.Procedures exist to
restrict access to equipment.
15.When there are numerous property and equipment transactions
during the year, an auditor who plans to assess control risk at a
low level usually performs:A.Tests of controls and extensive tests
of property and equipment balances at the end of the
year.B.Analytical procedures for current year property and
equipment transactions.C.Tests of controls and limited tests of
current year property and equipment transactions.D.Analytical
procedures for property and equipment balances at the end of the
year.
16.Which of the following best describes the auditors' approach
to the audit of the ending balance of property, plant and equipment
for a continuing nonpublic client?A.Direct audit of the ending
balance.B.Agreement of the beginning balance to prior year's
working papers and audit of significant changes in the
accounts.C.Audit of changes in the accounts since inception of the
company.D.Audit of selected purchases and retirements for the last
few years.
17.Which of the following is not a control that should be
established for purchases of equipment?A.Establishing a budget for
capital acquisitions.B.Requiring that the department 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 that will be
considered for capitalization.
18.Which of the following is not one of the auditors' objectives
in auditing depreciation?A.Establishing the reasonableness of the
client's 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 and equipment?A.The auditors observe a
physical inventory of plant and equipment, annually.B.The auditors
observe all additions to plant and equipment made during the
year.C.The auditors observe all major plant and equipment items in
the clients' accounts each year.D.The auditors observe major
additions to plant and equipment made during the year.
21.Which of the following is used to obtain evidence that the
client's equipment accounts are not understated?A.Analyzing repairs
and maintenance expense accounts.B.Vouching purchases of plant and
equipment.C.Recomputing depreciation expense.D.Analyzing the
miscellaneous revenue account.
22.Which of the following is not a test primarily used to test
property, plant and equipment accounts for
overstatement?A.Investigation of reductions in insurance
coverage.B.Review of property tax bills.C.Examination of retirement
work orders prepared during the year.D.Vouching retirements of
plant and equipment.
23.A continuing audit client's property, plant, and equipment
and accounts receivable accounts have approximately the same
year-end balance. In this circumstance, when compared to property,
plant, and equipment, one would normally expect the audit of
accounts receivable 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, the scope of audit procedures for which of
the following accounts would be expected to decrease the
most?A.Accounts receivable.B.Cash.C.Marketable
securities.D.Property, plant, and equipment.
25.When performing an audit of the property, plant, and
equipment accounts, an auditor should expect which of the following
to be most likely to indicate a departure from generally accepted
accounting principles?A.Repairs have been capitalized to 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 transactions recorded 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 three years ago by a continuing audit
client:A.Confirmation.B.Observation.C.Recomputation.D.Inquiry.
27.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.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 legal ownership of real property?A.Examination
of correspondence with the corporate counsel concerning acquisition
matters.B.Examination of ownership documents registered and on file
at a public hall of records.C.Examination of corporate minutes and
resolutions concerning the approval to acquire property, plant, and
equipment.D.Examination of deeds and title guaranty policies on
hand.
30.In violation of company policy, Lowell Company erroneously
capitalized the cost of painting its warehouse. The auditors
examining Lowell's financial statements would most likely detect
this when:A.Discussing capitalization policies with Lowell's
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.
31.Which of the following best describes the independent
auditors' approach to obtaining satisfaction concerning
depreciation expense in the income statement?A.Verify the
mathematical accuracy of the amounts charged to income as a result
of depreciation expense.B.Determine the method for computing
depreciation expense and ascertain that is in accordance with
generally accepted accounting principles.C.Reconcile the amount of
depreciation expense to those amounts credited to accumulated
depreciation accounts.D.Establish the basis for depreciable assets
and verify the depreciation expense.
32.The auditors are least likely to learn of retirements of
equipment through which of the following?A.Review of the purchase
returns and allowances account.B.Review of depreciation.C.Analysis
of the debits to the accumulated depreciation account.D.Review of
insurance policy riders.
33.For which of the following ledger accounts would the auditor
be most likely to analyze the details to identify understatements
of equipment acquisitions?A.Service Revenue.B.Sales.C.Repairs and
maintenance expense.D.Sales salaries expense.
34.Which of the following is the most important control
procedure over acquisitions of property, plant, and
equipment?A.Establishing a written company policy distinguishing
between capital and revenue expenditures.B.Using a budget to
forecast and control acquisitions and retirements.C.Analyzing
monthly variances between authorized expenditures and actual
costs.D.Requiring acquisitions to be made by user departments.
35.In the examination of property, plant, and equipment, the
auditor tries to determine all of the following except the:A.Extent
of the control risk.B.Extent of property abandoned during the
year.C.Adequacy of replacement funds.D.Reasonableness of the
depreciation.
36.Property acquisitions that are misclassified as maintenance
expense would most likely be detected by an internal control system
that provides for:A.Investigation of variances within a formal
budgeting system.B.Review and approval of the monthly depreciation
entry by the plant supervisor.C.Segregation of duties of employees
in the accounts payable department.D.Examination by the internal
auditors of vendor invoices and canceled checks for property
acquisitions.
Essay Questions
37.During the audit of Zing Company, Bill Jones, a staff member
on the audit, identified a number of items that have been included
as additions to property, plant, and equipment. He has indicated to
you that he believes the following items should not be capitalized.
Indicate with an "X" whether you believe the item should be
capitalized or expensed.
38.Plant and equipment are not as inherently risky as are other
assets, such as inventories and accounts receivable. However, a
company should still endeavor to maintain effective internal
control over plant and equipment.
a. Describe the principal purpose of internal controls relating
to plant and equipment.b. List and describe four major controls
applicable to plant and equipment.
39.Auditors should obtain evidence that there are no significant
amounts of unrecorded retirements of property, plant and
equipment.
a. Describe two ways that the auditors obtain evidence that
there are no significant amounts of unrecorded retirements of
property (land).b. Describe three ways that the auditors obtain
evidence that there are no significant amounts of unrecorded
retirements of equipment.
Chapter 13 Property, Plant, and Equipment: Depreciation and
Depletion Answer Key
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
AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementBloom's:
RememberDifficulty: EasyLearning Objective: 13-02 Identify the
auditors' objectives in the audit of property; plant; and
equipment.Topic: Property, Plant, and Equipment2.A major control
procedure related to plant and equipment is a budget for
depreciation.FALSE
AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementBloom's:
UnderstandDifficulty: MediumLearning Objective: 13-03 Explain the
fundamental controls over property; plant; and equipment.Topic:
Property, Plant, and Equipment3.Evidence of continued ownership of
property is obtained by vouching payments to a mortgage
trustee.TRUE
AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN:
Risk AnalysisBloom's: UnderstandDifficulty: MediumLearning
Objective: 13-06 Assess the risks of material misstatement of
property; plant; and equipment and design further audit procedures;
including tests of controls and substantive procedures; to address
the risks.Topic: Audit of Property, Plant, and Equipment4.The
auditors typically observe all major items of property, plant, and
equipment every year.FALSE
AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementBloom's:
UnderstandDifficulty: MediumLearning Objective: 13-03 Explain the
fundamental controls over property; plant; and equipment.Topic:
Property, Plant, and Equipment5.Material purchases of assets from
an affiliated company should be disclosed in the financial
statements.TRUE
AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN:
Risk AnalysisBloom's: RememberDifficulty: EasyLearning Objective:
13-06 Assess the risks of material misstatement of property; plant;
and equipment and design further audit procedures; including tests
of controls and substantive procedures; to address the risks.Topic:
Audit of Property, Plant, and Equipment6.Idle equipment will
generally need to be reclassified as a current asset.FALSE
AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN:
Risk AnalysisBloom's: RememberDifficulty: EasyLearning Objective:
13-06 Assess the risks of material misstatement of property; plant;
and equipment and design further audit procedures; including tests
of controls and substantive procedures; to address the risks.Topic:
Audit of Property, Plant, and Equipment7.The primary purpose of
internal control over plant and equipment is to safeguard the
assets from theft.FALSE
AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementBloom's:
UnderstandDifficulty: MediumLearning Objective: 13-03 Explain the
fundamental controls over property; plant; and equipment.Topic:
Property, Plant, and Equipment8.A typical procedure in the audit of
property is examination of public records to verify the ownership
of the property.FALSE
AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN:
Risk AnalysisBloom's: ApplyDifficulty: HardLearning Objective:
13-06 Assess the risks of material misstatement of property; plant;
and equipment and design further audit procedures; including tests
of controls and substantive procedures; to address the risks.Topic:
Audit of Property, Plant, and Equipment9.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
AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN:
Risk AnalysisBloom's: ApplyDifficulty: HardLearning Objective:
13-06 Assess the risks of material misstatement of property; plant;
and equipment and design further audit procedures; including tests
of controls and substantive procedures; to address the risks.Topic:
Audit of Property, Plant, and Equipment10.In the audit of depletion
the auditors must often rely on the work of specialists.TRUE
AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementBloom's:
UnderstandDifficulty: MediumLearning Objective: 13-08 Describe how
the auditors design audit procedures to audit intangible
assets.Topic: DepreciationMultiple 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.
AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementBloom's:
ApplyDifficulty: HardLearning Objective: 13-07 Explain the
auditors' approach to the audit of depreciation.Topic:
Depreciation12.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.
AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN:
Risk AnalysisBloom's: UnderstandDifficulty: MediumLearning
Objective: 13-06 Assess the risks of material misstatement of
property; plant; and equipment and design further audit procedures;
including tests of controls and substantive procedures; to address
the risks.Topic: Audit of Property, Plant, and Equipment13.A plant
manager would be most likely to provide information on which of the
following?A.Adequacy of the provision for uncollectible
accounts.B.Appropriateness of physical inventory valuation
techniques.C.Existence of obsolete production equipment.D.Deferral
of certain purchases of office supplies.
AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN:
Risk AnalysisBloom's: UnderstandDifficulty: MediumLearning
Objective: 13-06 Assess the risks of material misstatement of
property; plant; and equipment and design further audit procedures;
including tests of controls and substantive procedures; to address
the risks.Topic: Audit of Property, Plant, and Equipment14.Which of
the following would be least likely to address control over the
initiation and execution of equipment transactions?A.Requests for
major repairs are approved by a higher level than the department
initiating the request.B.Prenumbered purchase orders are used for
equipment and periodically accounted for.C.Requests for purchases
of equipment are reviewed for consideration of soliciting
competitive bids.D.Procedures exist to restrict access to
equipment.
AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementBloom's:
ApplyDifficulty: HardLearning Objective: 13-03 Explain the
fundamental controls over property; plant; and equipment.Topic:
Property, Plant, and Equipment15.When there are numerous property
and equipment transactions during the year, an auditor who plans to
assess control risk at a low level usually performs:A.Tests of
controls and extensive tests of property and equipment balances at
the end of the year.B.Analytical procedures for current year
property and equipment transactions.C.Tests of controls and limited
tests of current year property and equipment
transactions.D.Analytical procedures for property and equipment
balances at the end of the year.
AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN:
Risk AnalysisBloom's: ApplyDifficulty: HardLearning Objective:
13-06 Assess the risks of material misstatement of property; plant;
and equipment and design further audit procedures; including tests
of controls and substantive procedures; to address the risks.Topic:
Audit of Property, Plant, and Equipment16.Which of the following
best describes the auditors' approach to the audit of the ending
balance of property, plant and equipment for a continuing nonpublic
client?A.Direct audit of the ending balance.B.Agreement of the
beginning balance to prior year's working papers and audit of
significant changes in the accounts.C.Audit of changes in the
accounts since inception of the company.D.Audit of selected
purchases and retirements for the last few years.
AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN:
Risk AnalysisBloom's: UnderstandDifficulty: MediumLearning
Objective: 13-06 Assess the risks of material misstatement of
property; plant; and equipment and design further audit procedures;
including tests of controls and substantive procedures; to address
the risks.Topic: Audit of Property, Plant, and Equipment17.Which of
the following is not a control that should be established for
purchases of equipment?A.Establishing a budget for capital
acquisitions.B.Requiring that the department 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 that will be
considered for capitalization.
AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementBloom's:
UnderstandDifficulty: MediumLearning Objective: 13-03 Explain the
fundamental controls over property; plant; and equipment.Topic:
Property, Plant, and Equipment18.Which of the following is not one
of the auditors' objectives in auditing depreciation?A.Establishing
the reasonableness of the client's 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.
AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementBloom's:
RememberDifficulty: EasyLearning Objective: 13-07 Explain the
auditors' approach to the audit of depreciation.Topic:
Depreciation19.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.
AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN:
Risk AnalysisBloom's: ApplyDifficulty: HardLearning Objective:
13-06 Assess the risks of material misstatement of property; plant;
and equipment and design further audit procedures; including tests
of controls and substantive procedures; to address the risks.Topic:
Audit of Property, Plant, and Equipment20.Which of the following
best describes the auditors' typical observation of plant and
equipment?A.The auditors observe a physical inventory of plant and
equipment, annually.B.The auditors observe all additions to plant
and equipment made during the year.C.The auditors observe all major
plant and equipment items in the clients' accounts each year.D.The
auditors observe major additions to plant and equipment made during
the year.
AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN:
Risk AnalysisBloom's: UnderstandDifficulty: MediumLearning
Objective: 13-06 Assess the risks of material misstatement of
property; plant; and equipment and design further audit procedures;
including tests of controls and substantive procedures; to address
the risks.Topic: Audit of Property, Plant, and Equipment21.Which of
the following is used to obtain evidence that the client's
equipment accounts are not understated?A.Analyzing repairs and
maintenance expense accounts.B.Vouching purchases of plant and
equipment.C.Recomputing depreciation expense.D.Analyzing the
miscellaneous revenue account.
AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN:
Risk AnalysisBloom's: ApplyDifficulty: HardLearning Objective:
13-06 Assess the risks of material misstatement of property; plant;
and equipment and design further audit procedures; including tests
of controls and substantive procedures; to address the risks.Topic:
Audit of Property, Plant, and Equipment22.Which of the following is
not a test primarily used to test property, plant and equipment
accounts for overstatement?A.Investigation of reductions in
insurance coverage.B.Review of property tax bills.C.Examination of
retirement work orders prepared during the year.D.Vouching
retirements of plant and equipment.
AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN:
Risk AnalysisBloom's: ApplyDifficulty: HardLearning Objective:
13-06 Assess the risks of material misstatement of property; plant;
and equipment and design further audit procedures; including tests
of controls and substantive procedures; to address the risks.Topic:
Audit of Property, Plant, and Equipment23.A continuing audit
client's property, plant, and equipment and accounts receivable
accounts have approximately the same year-end balance. In this
circumstance, when compared to property, plant, and equipment, one
would normally expect the audit of accounts receivable to
require:A.More audit time.B.Less audit time.C.Approximately the
same amount of audit time.D.Similar confirmation procedures.
AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementBloom's:
UnderstandDifficulty: MediumLearning Objective: 13-02 Identify the
auditors' objectives in the audit of property; plant; and
equipment.Topic: Property, Plant, and Equipment24.When comparing an
initial audit with a subsequent year audit for a particular client,
the scope of audit procedures for which of the following accounts
would be expected to decrease the most?A.Accounts
receivable.B.Cash.C.Marketable securities.D.Property, plant, and
equipment.
AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementBloom's:
UnderstandDifficulty: MediumLearning Objective: 13-03 Explain the
fundamental controls over property; plant; and equipment.Topic:
Property, Plant, and Equipment25.When performing an audit of the
property, plant, and equipment accounts, an auditor should expect
which of the following to be most likely to indicate a departure
from generally accepted accounting principles?A.Repairs have been
capitalized to 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 transactions
recorded and described in the financial statements.D.The cost of
freight-in on an acquisition has been capitalized.
AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN:
Risk AnalysisBloom's: UnderstandDifficulty: MediumLearning
Objective: 13-06 Assess the risks of material misstatement of
property; plant; and equipment and design further audit procedures;
including tests of controls and substantive procedures; to address
the risks.Topic: Audit of Property, Plant, and Equipment26.The most
likely technique for the current year audit of goodwill which was
acquired three years ago by a continuing audit
client:A.Confirmation.B.Observation.C.Recomputation.D.Inquiry.
AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementBloom's:
UnderstandDifficulty: MediumLearning Objective: 13-08 Describe how
the auditors design audit procedures to audit intangible
assets.Topic: Depreciation27.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.Accounts
receivable.B.Cash.C.Current marketable securities.D.Property,
plant, and equipment.
AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN:
Risk AnalysisBloom's: UnderstandDifficulty: MediumLearning
Objective: 13-06 Assess the risks of material misstatement of
property; plant; and equipment and design further audit procedures;
including tests of controls and substantive procedures; to address
the risks.Topic: Audit of Property, Plant, and Equipment28.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.
AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementBloom's:
UnderstandDifficulty: MediumLearning Objective: 13-08 Describe how
the auditors design audit procedures to audit intangible
assets.Topic: Depreciation29.Which of the following is a customary
audit procedure for the verification of the legal ownership of real
property?A.Examination of correspondence with the corporate counsel
concerning acquisition matters.B.Examination of ownership documents
registered and on file at a public hall of records.C.Examination of
corporate minutes and resolutions concerning the approval to
acquire property, plant, and equipment.D.Examination of deeds and
title guaranty policies on hand.
AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN:
Risk AnalysisBloom's: UnderstandDifficulty: MediumLearning
Objective: 13-06 Assess the risks of material misstatement of
property; plant; and equipment and design further audit procedures;
including tests of controls and substantive procedures; to address
the risks.Source: AICPATopic: Audit of Property, Plant, and
Equipment30.In violation of company policy, Lowell Company
erroneously capitalized the cost of painting its warehouse. The
auditors examining Lowell's financial statements would most likely
detect this when:A.Discussing capitalization policies with Lowell's
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.
AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN:
Risk AnalysisBloom's: UnderstandDifficulty: MediumLearning
Objective: 13-06 Assess the risks of material misstatement of
property; plant; and equipment and design further audit procedures;
including tests of controls and substantive procedures; to address
the risks.Source: AICPATopic: Audit of Property, Plant, and
Equipment31.Which of the following best describes the independent
auditors' approach to obtaining satisfaction concerning
depreciation expense in the income statement?A.Verify the
mathematical accuracy of the amounts charged to income as a result
of depreciation expense.B.Determine the method for computing
depreciation expense and ascertain that is in accordance with
generally accepted accounting principles.C.Reconcile the amount of
depreciation expense to those amounts credited to accumulated
depreciation accounts.D.Establish the basis for depreciable assets
and verify the depreciation expense.
AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementBloom's:
UnderstandDifficulty: MediumLearning Objective: 13-07 Explain the
auditors' approach to the audit of depreciation.Source: AICPATopic:
Depreciation32.The auditors are least likely to learn of
retirements of equipment through which of the following?A.Review of
the purchase returns and allowances account.B.Review of
depreciation.C.Analysis of the debits to the accumulated
depreciation account.D.Review of insurance policy riders.
AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN:
Risk AnalysisBloom's: ApplyDifficulty: HardLearning Objective:
13-06 Assess the risks of material misstatement of property; plant;
and equipment and design further audit procedures; including tests
of controls and substantive procedures; to address the
risks.Source: AICPATopic: Audit of Property, Plant, and
Equipment33.For which of the following ledger accounts would the
auditor be most likely to analyze the details to identify
understatements of equipment acquisitions?A.Service
Revenue.B.Sales.C.Repairs and maintenance expense.D.Sales salaries
expense.
AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN:
Risk AnalysisBloom's: UnderstandDifficulty: MediumLearning
Objective: 13-06 Assess the risks of material misstatement of
property; plant; and equipment and design further audit procedures;
including tests of controls and substantive procedures; to address
the risks.Source: AICPATopic: Audit of Property, Plant, and
Equipment34.Which of the following is the most important control
procedure over acquisitions of property, plant, and
equipment?A.Establishing a written company policy distinguishing
between capital and revenue expenditures.B.Using a budget to
forecast and control acquisitions and retirements.C.Analyzing
monthly variances between authorized expenditures and actual
costs.D.Requiring acquisitions to be made by user departments.
AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementBloom's:
UnderstandDifficulty: MediumLearning Objective: 13-03 Explain the
fundamental controls over property; plant; and equipment.Source:
AICPATopic: Property, Plant, and Equipment35.In the examination of
property, plant, and equipment, the auditor tries to determine all
of the following except the:A.Extent of the control risk.B.Extent
of property abandoned during the year.C.Adequacy of replacement
funds.D.Reasonableness of the depreciation.
AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN:
Risk AnalysisBloom's: RememberDifficulty: EasyLearning Objective:
13-06 Assess the risks of material misstatement of property; plant;
and equipment and design further audit procedures; including tests
of controls and substantive procedures; to address the
risks.Source: AICPATopic: Audit of Property, Plant, and
Equipment36.Property acquisitions that are misclassified as
maintenance expense would most likely be detected by an internal
control system that provides for:A.Investigation of variances
within a formal budgeting system.B.Review and approval of the
monthly depreciation entry by the plant supervisor.C.Segregation of
duties of employees in the accounts payable
department.D.Examination by the internal auditors of vendor
invoices and canceled checks for property acquisitions.
AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN:
Risk AnalysisBloom's: UnderstandDifficulty: MediumLearning
Objective: 13-06 Assess the risks of material misstatement of
property; plant; and equipment and design further audit procedures;
including tests of controls and substantive procedures; to address
the risks.Source: AICPATopic: Audit of Property, Plant, and
EquipmentEssay Questions
37.During the audit of Zing Company, Bill Jones, a staff member
on the audit, identified a number of items that have been included
as additions to property, plant, and equipment. He has indicated to
you that he believes the following items should not be capitalized.
Indicate with an "X" whether you believe the item should be
capitalized or expensed.
AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementBloom's:
UnderstandDifficulty: MediumLearning Objective: 13-03 Explain the
fundamental controls over property; plant; and equipment.Topic:
Property, Plant, and Equipment38.Plant and equipment are not as
inherently risky as are other assets, such as inventories and
accounts receivable. However, a company should still endeavor to
maintain effective internal control over plant and equipment.
a. Describe the principal purpose of internal controls relating
to plant and equipment.b. List and describe four major controls
applicable to plant and equipment.
a. The principal purpose of internal controls relating to plant
and equipment is to obtain maximum 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 revenue expenditures.( A policy requiring all purchases of
plant and equipment through normal purchasing and receiving
procedures.( Periodic physical inventories.( A system of retirement
procedures, including serially numbered retirement work orders.
AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementBloom's:
ApplyDifficulty: HardLearning Objective: 13-03 Explain the
fundamental controls over property; plant; and equipment.Topic:
Property, Plant, and Equipment39.Auditors should obtain evidence
that there are no significant amounts of unrecorded retirements of
property, plant and equipment.
a. Describe two ways that the auditors obtain evidence that
there are no significant amounts of unrecorded retirements of
property (land).b. Describe three ways that the auditors obtain
evidence that there are no significant amounts of unrecorded
retirements of equipment.
a. The auditors obtain evidence that there are no significant
amounts of unrecorded retirements 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 unrecorded retirements of equipment by (only three
required):
( For major purchases, investigate related retirements.( Analyze
the Miscellaneous Revenue account to locate cash proceeds from sale
of equipment.( For discontinued operations, investigate related
retirements.( Inquire of executives and supervisors.( Investigate
reductions in insurance coverage.
AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN:
Risk AnalysisBloom's: ApplyDifficulty: HardLearning Objective:
13-06 Assess the risks of material misstatement of property; plant;
and equipment and design further audit procedures; including tests
of controls and substantive procedures; to address the risks.Topic:
Audit of Property, Plant, and Equipment13-1