1 When auditing prepaid insurance an auditor discovers that the
1. When auditing prepaid insurance, an auditor discovers that the original insurance policy on a key piece of manufacturing equipment is not avail-able for inspection. The policy’s absence most likely indicates the possibility of a(n)
a. Insurance premium due but not recorded.
b. Fictitious piece of equipment.
c. Third- party lien holder with a secured interest in the equipment.
d. Understatement of insurance expense.

2. Which of the following internal controls is most likely to justify a reduction of control risk concerning plant and equipment acquisitions?
a. Periodic physical inspection and reconciliation of plant and equipment to the detailed accounting records by the internal audit staff.
b. Comparison of current- year plant and equipment account balances with prior- year actual balances.
c. Review of prenumbered purchase orders to detect unrecorded trade-ins.
d. Approval of periodic depreciation entries by a supervisor independent of the accounting department.

3. To strengthen control over the custody of heavy mobile equipment, the client would most likely institute a policy requiring a periodic
a. Increase in insurance coverage.
b. Inspection of equipment and reconciliation with accounting records.
c. Verii cation of liens, pledges, and collateralizations.
d. Accounting for work orders.

4. Due to a weakness observed in an entity’s control over recording retirement of equipment, the auditor may decide to
a. Trace additions to the “ other assets” account to search for equipment that is still on hand but no longer being used.
b. Select certain items of equipment from the accounting records and locate them in the plant.
c. Inspect certain items of equipment in the plant and trace those items to the accounting records.
d. Review the subsidiary ledger to ascertain whether depreciation was taken on each item of equipment during the year.

5. Which of the following procedures is most likely to prevent the improper disposition of equipment?
a. Separation of duties between those authorized to dispose of equipment and those authorized to approve removal work orders.
b. The use of serial numbers to identify equipment that could be sold.
c. Periodic comparison of removal work orders to authorizing documentation.
d. Periodic analysis of the scrap sales and the repairs and maintenance accounts.

6. Property acquisitions that are misclassii ed 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 auditor of vendor invoices and canceled checks for property acquisitions.

7. Which of the following situations would not support the auditor’s decision to reduce control risk below maximum for the audit of intangible assets?
a. The client employs a qualii ed specialist who reviews the value of the intangible assets on an annual basis for impairment.
b. The auditor documented, tested, and developed an understanding of the acquisition process and found the key controls to be effective.
c. The IT system that maintains the records for intangible assets has adequate controls to prevent unauthorized access.
d. The company has made no acquisitions of other companies during the i scal year under audit.

8. Which of the following control activities would most likely allow for a reduc-tion in the scope of the auditor’s tests of depreciation expense?
a. Review and approval of the periodic equipment depreciation entry by a supervisor who does not actively participate in its preparation.
b. Comparison of equipment account balances for the current year with the current- year budget and prior- year actual balances.
c. Review of the miscellaneous income account for salvage credits and scrap sales of partially depreciated equipment.
d. Authorization of payment of vendor’s invoices by a designated employee who is independent of the equipment- receiving function.

9 When there are numerous property and equipment transactions during the year, an auditor who plans to set the control risk at a low level usually performs
a. Substantive analytical procedures for property and equipment balances at the end of the year.
b. Tests of controls and extensive tests of property and equipment balances at the end of the year.
c. Substantive analytical procedures for current- year property and equip-ment transactions.
d. Tests of controls and limited tests of current- year property and equipment transactions.

10. An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the assertion that all
a. Noncapitalizable expenditures for repairs and maintenance have been properly charged to expense.
b. Expenditures for property and equipment have not been charged to expense.
c. Noncapitalizable expenditures for repairs and maintenance have been recorded in the proper period.
d. Expenditures for property and equipment have been recorded in the proper period. LO
11. Which of the following combinations of procedures would an auditor be most likely to perform to obtain evidence about fixed- asset additions?
a. Inspecting documents and physically examining assets.
b. Recomputing calculations and obtaining written management representations.
c. Observing operating activities and comparing balances to prior- period balances.
d. Confirming ownership and corroborating transactions through inquiries of client personnel.

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