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Auditing Property, Plant and Equipment and Proper Cut-off of Purchases

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1. Explain why the emphasis in auditing property, plant, and equipment is on the current period acquisitions and disposals rather than on the balances in the account carried forward from the preceding year. Under what circumstances will the emphasis be on the balances carried forward?

2. Explain why a proper cutoff of purchases and sales is heavily dependent on the physical inventory observation. What information should be obtained during the physical count to make sure that cutoff is accurate?

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The reason the emphasis is on the current period for acquisitions and disposals is that the property, plant and equipment are permanent assets that are expected to be kept and maintained for several years.

In the event that it can't be shown that controls and substantive tests of transactions have been recorder for all disposals. There will be additional testing of the prior balance maybe required. Also, the first year audit requires ...

Solution Summary

267-word examination of the audit processes for auditing property, plant and equipment. Also, the proper way to conduct an audit of cutoff of purchases and physical inventory is discussed.

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Audit: 40 multiple choice covering a wide range of comprehensive audit topics.

Audit questions

1 Which of the following procedures would an auditor least likely perform before the balance sheet date?
a. Confirmation of accounts payable.
b. Observation of merchandise inventory.
c. Assessment of control risk.
d. Identification of related parties.

2 An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal and the cash disbursements journal. The purpose of this substantive audit procedure most likely was to
a. Identify unusually large purchases that should be investigated further.
b. Verify that cash disbursements were for goods actually received.
c. Determine that purchases were properly recorded.
d. Test whether payments were for goods actually ordered.

3 Which of the following procedures would an auditor most likely perform in searching for unrecorded payables?
a. Reconcile receiving reports with related cash payments made just prior to year-end.
b. Contrast the ratio of accounts payable to purchases with the prior year's ratio.
c. Vouch a sample of creditor balances to supporting invoices, receiving reports, and purchase orders.
d. Compare cash payments occurring after the balance sheet date with the accounts payable trial balance.

4 An auditor performs a test to determine whether all merchandise for which the client was billed was received. The population for this test consists of all
a. Merchandise received.
b. Vendors' invoices.
c. Canceled checks.
d. Receiving reports.

5. As an in-charge auditor you are reviewing a summary of control weaknesses in cash disbursement procedures. Which one of the following weaknesses, standing alone, should cause you the least concern?
a. Checks are signed by only one person.
b. Signed checks are distributed by the controller to approved payees.
c. Treasurer fails to establish bona fides of names and addresses of check payees.
d. Cash disbursements are made directly out of cash receipts.

6. Which of the following procedures would normally be performed by the auditor when making tests of payroll transactions?
a. Interview employees selected in a statistical sample of payroll transactions.
b. Trace number of hours worked as shown on payroll to time cards and time reports signed by the foreman.
c. Confirm amounts withheld from employees salaries with proper governmental authorities.
d. Examine signatures on paid salary checks.

7. Which of the following circumstances most likely would cause an auditor to suspect an employee payroll fraud scheme?
a. There are significant unexplained variances between standard and actual labor cost.
b. Payroll checks are disbursed by the same employee each payday.
c. Employee time cards are approved by individual departmental supervisors.
d. A separate payroll bank account is maintained on an imprest basis.

8. An auditor vouched data for a sample of employees in a payroll register to approved clock card data to provide assurance that
a. Payments to employees are computed at authorized rates.
b. Employees work the number of hours for which they are paid.
c. Segregation of duties exist between the preparation and distribution of the payroll.
d. Internal controls relating to unclaimed payroll checks are operating effectively.

9. An auditor most likely would extend substantive tests of payroll when
a. Payroll is extensively audited by the state government.
b. Payroll expense is substantially higher than in the prior year.
c. Overpayments are discovered in performing tests of details.
d. Employees complain to management about too much overtime.

10. An auditor would consider internal control over a client's payroll procedures to be ineffective if the payroll department supervisor is responsible for
a. Hiring subordinate payroll department employees.
b. Having custody over unclaimed paychecks.
c. Updating employee earnings records.
d. Applying pay rates to time tickets.

11. An auditor will usually trace the details of the test counts made during the observation of the physical inventory taking to a final inventory schedule. This audit procedure is undertaken to provide evidence that items physically present and observed by the auditor at the time of the physical inventory count are
a. Owned by the client.
b. Not obsolete.
c. Physically present at the time of the preparation of the final inventory schedule.
d. Included in the final inventory schedule.

12. Which of the following audit procedures would provide the least reliable evidence that the client has legal title to inventories?
a. Confirmation of inventories at locations outside the client's facilities.
b. Analytical review of inventory balances compared to purchasing and sales activities.
c. Observation of physical inventory counts.
d. Examination of paid vendors' invoices.

13. An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support management's financial statement assertion of
a. Valuation or allocation.
b. Rights and obligations.
c. Existence or occurrence.
d. Presentation and disclosure.

14. A client maintains perpetual inventory records in both quantities and dollars. If the assessed level of control risk is high, an auditor would probably
a. Increase the extent of tests of controls of the inventory cycle.
b. Request the client to schedule the physical inventory count at the end of the year.
c. Insist that the client perform physical counts of inventory items several times during the year.
d. Apply gross profit tests to ascertain the reasonableness of the physical counts.

15. An auditor selected items for test counts while observing a client's physical inventory. The auditor then traced the test counts to the client's inventory listing. This procedure most likely obtained evidence concerning management's assertion of
a. Rights and obligations.
b. Completeness.
c. Existence or occurrence.
d. Valuation.

16. A normal audit procedure is to analyze the current year's repairs and maintenance accounts to provide evidence in support of the audit proposition that
a. Expenditures for fixed assets have been recorded in the proper period.
b. Capital expenditures have been properly authorized.
c. Noncapitalizable expenditures have been properly expensed.
d. Expenditures for fixed assets have been capitalized.

17. Determining that proper amounts of depreciation are expensed provides assurance about management's assertions of valuation or allocation and
a. Presentation and disclosure.
b. Completeness.
c. Rights and obligations.
d. Existence or occurrence.

18. In testing plant and equipment balances, an auditor may inspect new additions listed on the analysis of plant and equipment. This procedure is designed to obtain evidence concerning management's assertions about
Existence or Presentation
Occurrence and Disclosure
a. Yes Yes
b. Yes No
c. No Yes
d. No No

19. An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the audit assertion that all
a. Noncapitalizable expenditures for repairs and maintenance have been recorded in the proper period.
b. Expenditures for property and equipment have been recorded in the proper period.
c. Noncapitalizable expenditures for repairs and maintenance have been properly charged to expense.
d. Expenditures for property and equipment have not been charged to expense.

20. In the examination of property, plant, and equipment, the auditor tries to determine all of the following except the
a. Adequacy of internal control.
b. Extent of property abandoned during the year.
c. Adequacy of replacement funds.
d. Reasonableness of the depreciation.

21. Several years ago Conway, Inc., secured a conventional real estate mortgage loan. Which of the following audit procedures would be least likely to be performed by an auditor examining the mortgage balance?
a. Examine the current year's canceled checks.
b. Review the mortgage amortization schedule.
c. Inspect public records of lien balances.
d. Recompute mortgage interest expense.

22. During the course of an audit, a CPA observes that the recorded interest expense seems to be excessive in relation to the balance in the long-term debt account. This observation could lead the auditor to suspect that
a. Long-term debt is understated.
b. Discount on bonds payable is overstated.
c. Long-term debt is overstated.
d. Premium on bonds payable is understated.

23. The auditor can best verify a client's bond sinking fund transactions and year-end balance by
a. Recomputation of interest expense, interest payable, and amortization of bond discount or premium.
b. Confirmation with individual holders of retired bonds.
c. Confirmation with the bond trustee.
d. Examination and count of the bonds retired during the year.

24. An audit program for the examination of the retained earnings account should include a step that requires verification of the
a. Gain or loss resulting from disposition of treasury shares.
b. Market value used to charge retained earnings to account for a two-for-one stock split.
c. Authorization for both cash and stock dividends.
d. Approval of the adjustment to the beginning balance as a result of a write-down of an account receivable.

25. An auditor most likely would inspect loan agreements under which an entity's inventories are pledged to support management's financial statement assertion of:
a. Existence or occurrence.
b. Completeness.
c. Presentation and disclosure.
d. Valuation or allocation.

26. When auditing contingent liabilities, which of the following procedures would be least effective?
a. Reading the minutes of the board of directors.
b. Reviewing the bank confirmation letter.
c. Examining customer confirmation replies.
d. Examining invoices for professional services.

27. An auditor would be most likely to identify a contingent liability by mailing a(n)
a. Standard bank confirmation.
b. Related party transaction confirmation.
c. Accounts payable confirmation.
d. .Transfer agent confirmation

28. An auditor is concerned with completing various phases of the examination after the balance sheet date. This "subsequent period" extends to the date of the
a. Auditor's report.
b. Final review of the audit working papers.
c. Public issuance of the financial statements.
d. Delivery of the auditor's report to the client

29. As part of an audit, a CPA often requests a representation letter from the client. Which one of the following is not a valid purpose of such a letter?
a. To provide audit evidence.
b. To emphasize to the client the auditor's responsibility for the fairness of the financial statements.
c. To satisfy himself or herself by means of other auditing procedures when certain customary auditing procedures are not performed.
d. To provide possible protection to the CPA against a charge of knowledge in cases where fraud is subsequently discovered to have existed in the accounts.

30. After an auditor has issued an audit report on a nonpublic entity, there is no obligation to make any further audit tests or inquiries with respect to the audited financial statements covered by that report unless
a. New information comes to the auditor's attention concerning an event which occurred prior to the date of the auditor's report which may have affected the auditor's report.
b. Material adverse events occur after the date of the auditor's report.
c. Final determination or resolution was made on matters which had resulted in a qualification in the auditor's report.
d. Final determination or resolution was made of a contingency which had been disclosed in the financial statements.

31. Which of the following procedures would an auditor ordinarily perform during the review of subsequent events?
a. Review the cut-off bank statements for the period after the year-end.
b. Inquire of the client's legal counsel concerning litigation.
c. Investigate reportable conditions previously communicated to the client.
d. Analyze related party transactions to discover possible irregularities.

32. Stone was asked to perform the first audit of a wholesale business that does not maintain perpetual inventory records. Stone has observed the current inventory but has not observed the physical inventory at the previous year-end date and concludes that the opening inventory balance, which is not auditable, is a material factor in the determination of cost of goods sold for the current year. Stone will probably
a. Decline the engagement.
b. Express an unqualified opinion on the balance sheet and income statement except for inventory.
c. Express an unqualified opinion on the balance sheet and disclaim an opinion on the income statement.
d. Disclaim an opinion on the balance sheet and income statement.

33. In connection with the examination of the consolidated financial statements of Mott Industries, Frazier, CPA, plans to refer to another CPA's examination of the financial statements of a subsidiary company. Under these circumstances, Frazier's report must disclose.
a. The name of the other CPA and the type of report issued by the other CPA.
b. The magnitude of the portion of the financial statements examined by the other CPA.
c. The nature of Frazier's review of the other CPA's work.
d. In a footnote the portions of the financial statements that were covered by the examinations of both auditors

34. An auditor's report on comparative financial statements should be dated as of the date of the
a. Issuance of the report.
b. Completion of the auditor's recent field work.
c. Latest financial statements being reported on.
d. Last subsequent event disclosed in the statements.

35. An auditor is reporting on cash-basis financial statements. These statements are best referred to in his or her opinion by which one of the following descriptions?
a. Financial position and results of operations arising from cash transactions.
b. Assets and liabilities arising from cash transactions, and revenue collected and expenses paid.
c. Balance sheet and income statement resulting from cash transactions.
d. Cash balance sheet and the source and application of funds.

36. An auditor's report issued in connection with which of the following is generally not considered to be a special report?
a. Compliance with aspects of contractual agreements unrelated to audited financial statements.
b. Specified elements, accounts, or items of a financial statement presented in a document.
c. Financial statements prepared in accordance with an entity's income tax basis.
d. Financial information presented in a prescribed schedule that requires a prescribed form of auditor's report.

37. When an auditor expresses an adverse opinion, the opinion paragraph should include:
a. The principal effects of the departure from generally accepted accounting principles.
b. A direct reference to a separate paragraph disclosing the basis for the opinion.
c. The substantive reasons for the financial statements being misleading.
d. A description of the uncertainty or scope limitation that prevents an unqualified opinion.

38. Which of the following statements is correct with respect to ownership, possession, or access to a CPA firm's audit workpapers?
a. Workpapers are subject to the privileged communication rule which, in most jurisdictions, prevents any third-party access to the workpapers.
b. Workpapers may never be obtained by third parties unless the client consents.
c. Workpapers are the client's exclusive property.
d. Workpapers are not transferable to a purchaser of a CPA practice unless the client consents.

39. When performing an audit, a CPA will most likely be considered negligent when the CPA fails to
a. Detect all of a clients fraudulent activities.
b. Include a negligence disclaimer in the client engagement letter.
c. Warn a client of known internal control weaknesses.
d. Warn a clients customers of embezzlement by the clients employees.

40. Under common law, which of the following statements most accurately reflects the liability of a CPA who fraudulently gives an opinion on an audit of a client's financial statements?
a. The CPA is liable only to third parties in privity of contract with the CPA.
b. The CPA is liable only to known users of the financial statements.
c. The CPA probably is liable to any person who suffered a loss as a result of the fraud.
d. The CPA probably is liable to the client even if the client was aware of the fraud and did not rely on the opinion.

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