Multiple Choice Questions
Select the best answer for each of the questions below and explain fully the reason for your selection.
a. To assure accountability for fixed asset retirements, management should implement an internal control that includes:
(1) Continuous analysis of miscellaneous revenue to locate any cash proceeds from the sale of plant assets.
(2) Periodic inquiry of plant executives by internal auditors as to whether any plant assets have been retired.
(3) Utilization of serially numbered retirement work orders.
(4) Periodic observation of plant assets by the internal auditors.

b. The auditors may conclude that depreciation charges are insufficient by noting:
(1) Insured values greatly in excess of book values.
(2) Large amounts of fully depreciated assets.
(3) Continuous trade-ins of relatively new assets.
(4) Excessive recurring losses on assets retired.

c. Which of the following is an internal control weakness related to factory equipment?
(1) Checks issued in payment of purchases of equipment are not signed by the controller.
(2) All purchases of factory equipment are required to be made by the department in need of the equipment.
(3) Factory equipment replacements are generally made when estimated useful lives, as indicated in depreciation schedules, have expired.
(4) Proceeds from sales of fully depreciated equipment are credited to other income.

d. Which of the following accounts should be reviewed by the auditors to gain reasonable assurance that additions to property, plant, and equipment are not understated?
(1) Depreciation.
(2) Accounts Payable.
(3) Cash.
(4) Repairs.

e. The auditors are most likely to seek information from the plant manager with respect to the
(1) Adequacy of the provision for uncollectible accounts.
(2) Appropriateness of physical inventory observation procedures.
(3) Existence of obsolete machinery.
(4) Deferral of procurement of certain necessary insurance coverage.

f. To strengthen internal control over the custody of heavy mobile equipment, the client would most likely institute a policy requiring a periodic:
(1) Increase in insurance coverage.
(2) Inspection of equipment and reconciliation with accounting records.
(3) Verification of liens, pledges, and collateralizations.
(4) Accounting for work orders.

g. Which of the following statements is not typical of property, plant, and equipment as com- pared to most current asset accounts?
(1) A property, plant, and equipment cutoff error near year-end has a more significant effect on net income.
(2) Relatively few transactions occur in property, plant, and equipment during the year.
(3) The assets involved with property, plant, and equipment ordinarily have relatively longer lives.
(4) Property, plant, and equipment accounts typically have a higher dollar value.

h. For the audit of a continuing nonpublic client, the emphasis of the testing for property accounts is on:
(1) All transactions resulting in the ending balance.
(2) Tests of controls over disposals.
(3) Transactions that occurred during the year.
(4) Performing analytical procedures on beginning balances of the accounts.

i. Audit of which of the following accounts is most likely to reveal evidence relating to recorded retirements of equipment?
(1) Accumulated depreciation.
(2) Cost of goods sold.
(3) Purchase returns and allowances.
(4) Purchase discounts.

j. An effective procedure for identifying unrecorded retirements of equipment is to:
(1) Foot related property records.
(2) Recalculate depreciation on the related equipment.
(3) Select items of equipment in the accounting records and then locate them in the plant.
(4) Select items of equipment and then locate them in the accounting records.

k. Which of the following is not an overall test of the annual provision for depreciation expense?
(1) Compare rates used in the current year with those used in prior years.
(2) Test computation of depreciation provisions for a representative number of units.
(3) Test deductions from accumulated depreciation for assets purchased during the year.
(4) Perform analytical procedures.

l. The audit of intangible assets typicallyinvolves

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Vouching the Cost of Assets Yes Yes No No Testing Allocation Methods No No