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

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

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) company has a policy of selling relatively new assets

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

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 three of the above

The auditor must know the client's capitalization policies to determine whether acquisitions are:
Recorded at historical cost
Treated consistently with those of preceding year
Necessary
A) YYY B) YNN C) NNN D) NYN

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

A) have expected useful lives of more than one year. B) not be acquired for resale.
C) be useful in multiple productive capacities within the organization. D) A and B, but not C

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

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

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

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

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

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

The source of debits in the equipment account is the:

A) sales journal.
B) cash disbursements journal.
C) cash receipts journal.
D) acquisitions journal
D
Failure to capitalize a fixed asset at the correct amount would impact which financial statements until the
company disposes of the asset?
A) The balance sheet only
B) The income statement only
C) The cash flow statement only
D) Both the income statement and the balance sheet
D
Which of the following tests are typically not necessary when auditing a client's schedule of recorded
disposals?
A) Footing the schedule
B) Tracing schedule totals to the general ledger
C) Tracing cost and accumulated depreciation of the disposals to the property master file
D) All of the above are necessary
D
Which of the following is an 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
B
A set of records for each piece of equipment that includes descriptive information, date of acquisition,
original cost, current year depreciation, and accumulated depreciation is the:
A) acquisitions journal.
B) depreciation schedule.
C) fixed asset master file.
D) file of purchase requisitions
C
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
D
Methods used to determine if there are legal encumbrances related to fixed assets include all but which of
the following?
A) Reading terms of loan and credit agreements
B) Reviewing loan confirmations received from banks
C) Having discussions with the client or sending letters to legal counsel
D) All of the above may be used to identify legal encumbrances
D
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
D
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
A
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
C
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
D
Because the failure to record disposals of property, plant, and equipment can significantly affect the
financial statements, the search for unrecorded disposals is essential. Which of the following is not a
procedure used to verify disposals?
A) Make inquiries of management and production personnel about the possibility of the disposal of assets.
B) Review whether newly acquired assets replace existing assets.
C) Test the valuation of fixed assets recorded in prior periods.
D) Review plant modifications and changes in product line, taxes, or insurance coverage
C
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
D
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
B
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
C
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
B
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
A
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
C
The auditor is examining the accounting entries made to the accumulated depreciation account during the year
and notices a significant amount 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 were revised
A
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
B
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
B
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
A
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 years depreciation expense with the previous year's depreciation expense.
D) Trace acquisition documents to the fixed asset master file
A
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
D
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
A
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
B
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
A
Which of the following accounts would normally not be a part of the acquisition and payment cycle of Prepaid
Insurance?
A) Cash
B) Insurance Payable
C) Insurance Expense
D) Prepaid Insurance
B
Which type of audit procedure would normally be sufficient for purposes of auditing prepaid expenses and
deferred charges?
A) Tests of controls
B) Tests of transactions
C) Tests of details of balances
D) Analytical procedures
D
When an auditor recomputes the unexpired portion of prepaid insurance, they are satisfying which audit
objective?
A) Completeness
B) Existence
C) Accuracy and detail tie-in
D) Rights
C
A record of insurance policies in force and the due date of each policy is contained in the:
A) voucher register.
B) insurance register.
C) insurance expense account.
D) prepaid insurance account
B
Insurance expense for the period is a function of which of the following?
A) The beginning prepaid balance, current premium payments and the ending prepaid balance
B) The beginning prepaid balance and the current period premium payments
C) The current period premium payments
D) The current period premium payments and the ending prepaid balance
A
In connection with a review of the prepaid insurance account, which of the following audit procedures would
you be least likely to use?
A) Recompute the portion of the premium that expired during the year.
B) Prepare excerpts of insurance policies for audit working papers.
C) Confirm premium rates with an independent insurance broker.
D) Examine support for premium payments
C
Controls over the acquisition and recording of insurance are a part of which of the following transaction cycles?
A) Inventory and warehousing cycle
B) Capitalization cycle
C) Treasury cycle
D) Acquisition and payment cycle
D
Which balance-related audit objective is not relevant to an audit of prepaid expenses?
A) Rights
B) Accuracy
C) Detail tie-in
D) Realizable value
D
When auditing accrued property taxes:
A) the source for the debits to the liability account is the acquisitions journal.
B) realizable value is an important balance-related audit objective.
C) the ending balance in the account should be confirmed with the applicable taxing authority.
D) the most important consideration for the auditor is that the same portion of each tax payment for the accrual
that was used in the preceeding year is used in the current year
D
The estimated unpaid obligations for services or benefits that have been received before the balance sheet date
are:
A) accounts payable.
B) accounts receivable.
C) unearned liabilities.
D) accrued liabilities
D
When auditors verify accrued property taxes two audit objectives are especially significant. These are:
A) completeness and accuracy.
B) completeness and net realizable value.
C) detail tie-in and completeness.
D) accuracy and classification
A
When auditing accrued property taxes:
A) the auditors will generally only verify the larger payments since there are usually many property tax
payments.
B) property taxes should only be charged to one expense account.
C) the auditor begins by obtaining a schedule of property tax payments from
C
The audit procedures used to verify accrued liabilities differ from those employed for the verification of
accounts payable because:
A) accrued liability balances are less material than accounts payable balances.
B) accrued liabilities at year end will become accounts payable during the following year.
C) evidence supporting accrued liabilities is non-existent, whereas evidence supporting accounts payable is
readily available.
D) accrued liabilities usually pertain to services of a continuing nature, whereas accounts payable are the result
of completed transactions.
D
Which of the following audit tests both have the effect of simultaneously verifying balance sheet and income
statement accounts?
A) Analytical procedures and substantive tests of transactions
B) Tests of controls and substantive tests of transactions
C) Tests of details of balances and substantive tests of transactions
D) Tests of controls and analytical procedures
B
The most effective and efficient audit approach in the examination of the income statement would be which of
the following?
A) Examine income statement accounts concurrently with the related balance sheet accounts.
B) Compare company's components of net income to other businesses in the same industry.
C) Compare company's components of net income to the previous two years.
D) Examine changes in all balance sheet accounts
A
The auditor needs to be aware that most users of financial statements rely most heavily on the ________ for
making decisions.
A) balance sheet
B) income statement
C) statement of cash flows
D) statement of stockholders' equity
B
) ________ expense is rarely analyzed unless analytical procedures indicate high potential for material
misstatement.
A) Repairs and maintenance
B) Legal
C) Utilities
D) Rent and lease
C