44) Property, plant, and equipment is normally audited in a different manner than current asset
accounts. State three reasons why this is so, and discuss the differences in how property, plant,
and equipment is audited compared to current assets.
45) State four of the seven specific balance-related audit objectives for property, plant, and
equipment additions and, for each objective, describe one common test of details of balances.
46) When auditing disposals of property, plant, and equipment, the search for unrecorded
disposals is essential. State the four audit procedures frequently used for verifying disposals.
47) Discuss the key internal controls related to the disposal of property, plant, and equipment.
48) One of the auditor’s primary objectives when auditing manufacturing equipment is
completeness.
49) Completeness and existence are the auditor’s primary objectives in auditing manufacturing
equipment.
50) The primary characteristic that distinguishes property, plant, and equipment from inventory,
prepaid expenses, and investments is the intention to use property, plant, and equipment as a part
of the operations of the client’s business over their expected life.
51) The emphasis in auditing manufacturing equipment is on the verification of current-period
disposals and acquisitions.
52) The starting point for the verification of current-year acquisitions of property, plant, and
equipment is normally a client-prepared schedule of all acquisitions recorded in the general
ledger during the year.
53) Depreciation amounts are determined by exchange transactions with outside parties.
54) Depreciation expense is normally verified as a part of tests of details of balances rather than
as part of tests of controls or substantive tests of transactions.
55) The most important audit objective for depreciation expense is detail tie-in.
56) One of the reasons that auditors verify equipment differently from current assets is the
amount of any given equipment acquisition is often material.
57) The transportation and installation costs for a piece of equipment should be charged to an
expense account.
58) The auditor’s tests for proper cutoff of current year acquisitions of property, plant, and
equipment are usually done as part of accounts payable cutoff tests.
59) The company’s choices for determining the fixed asset’s useful life and residual value impact
the amount of depreciation recorded.
60) The audit procedure “foot the schedule of fixed assets acquisitions and trace the total to the
general ledger” relates most closely to the completeness objective for fixed assets acquisitions.
61) Confirmations are commonly used to verify additions of property, plant, and equipment.
62) One very useful method of auditing depreciation is to use an analytical procedure to test for
reasonableness.
64) Recording an acquisition of a fixed asset at an improper amount affects the balance sheet
until the company disposes of the asset, but the income statement is not affected.
65) Ordinarily, if you are auditing a continuing client, it is unnecessary to test the accuracy
objective or the classification objective for fixed assets acquired in prior years.
66) When auditing acquisitions of property, plant, and equipment, the auditor’s review of lease
and rental agreements most closely relate to the cutoff objective.
67) Performance materiality is important for verifying current year additions because these
transactions have consistent dollar amounts from year to year.
19.3 Learning Objective 19-3
1) 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
2) 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) substantive analytical procedures
3) 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
4) 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.
5) 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
6) 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.
7) 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
8) 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
9) When auditing prepaid insurance,
A) for many audits, significant substantive procedures are needed if the control risk is low.
B) companies often have a standard monthly journal entry to reclassify prepaid insurance as
insurance expense.
C) the emphasis in the tests of details of balances is on insurance expense.
D) the auditor must prepare the insurance register.
10) Describe the two tests auditors can perform to test for the existence and completeness of
insurance policies in force.
11) What are several substantive analytical procedures used in the audit of prepaid insurance and
insurance expense?
12) Describe the audit procedures used to verify the accuracy and detail tie-in objectives for
prepaid insurance.
13) Discuss the key internal controls for prepaid insurance that affect the auditor’s extent of
testing of the prepaid insurance account.
14) The realizable value audit objective is not applicable when auditing prepaid insurance or
insurance expense.
15) Problems commonly encountered in the audit of prepaid insurance are not typical of the
problems found in other prepaid assets.
16) Cutoff for acquisitions of insurance is normally not a significant problem for the auditors.
17) When auditing insurance expense, auditors normally rely on analytical procedures and
limited testing of the debits to ensure that they arose from credits to prepaid insurance.
18) The auditor should keep in mind that the amount in insurance expense is a residual amount.
19.4 Learning Objective 19-4
1) 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 preceding year is used in the current year.
2) 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.
3) 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.
4) 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 the client.
D) the auditor must generally spend a considerable amount of time in this area.
5) Auditors verify the accruals before they verify the current year property tax payments.
6) After the accrual and property tax expense for each piece of property has been recalculated,
the totals are added and compared with the general ledger.
7) In the audit of accrued property taxes, the two most important balance-related audit objectives
are completeness and accuracy.
19.5 Learning Objective 19-5
1) 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
2) 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.
3) 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
4) ________ 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
5) Explain the audit objective allocation and why it is important to have accurate allocation
within the financial statements, particularly for property, plant, and equipment.
6) In the analysis of expense accounts, the auditor verifies transactions in specific accounts to
determine whether the transactions are properly classified and accurately recorded.
7) Depreciation expense results from the allocation of accounting data rather than discrete
transactions.
8) Tests of controls provide an indication of the likelihood of misstatements in both the income
statement and the balance sheet, simultaneously.
9) Typically, analytical procedures are the primary means of verifying income statement
accounts resulting from allocations.