Chapter 12 – Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal
58. Which statement is true?
a.
Management is always reluctant to write down asset values.
b.
Intangible assets do not require effective controls because they have low inherent risk.
c.
Complex ownership structures may create challenges in the recording of assets.
d.
The incomplete recording of asset disposals understates the asset balance.
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Identify and Assess Inherent Risk of Misstatement Associated with Long-Lived
Assets
59. Which of the following controls is not a typical control that affects multiple assertions for long-lived assets?
a.
Reviewing insurance policies for adequate replacement coverage of assets.
b.
Formal budgeting process with appropriate follow-up variance analysis.
c.
Periodic comparison of physical assets to subsidiary records with the general ledger.
d.
Periodic reconciliations of subsidiary records with the general ledger.
60. Which of the following controls related to management’s asset impairment judgments does the auditor need
to understand?
a.
A systematic process to identify assets that are not currently in use.
b.
Projections of future cash flows that is based on management’s strategic plans and economic
conditions.
c.
Systematic development of current market values of similar assets prepared by the client.
d.
All of the above.
d
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AUDT.JOHN.16.134 – Control Risks
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61. For intangible assets, controls should be designed to do which of the following?
a.
Identify and account for intangible asset impairments.
b.
Develop amortization schedules that reflect the remaining useful life of patents or copyrights
associated with the asset.
c.
Provide reasonable assurance that decisions are appropriately made as to when to capitalize or
expense research and development expenditures.
d.
All of the above.
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62. Which of the following is not a technique that auditors can use when performing preliminary analytical
procedures related to long-lived assets?
a.
Perform an overall estimate of depreciation expense.
b.
Review and analyze gains/losses on disposals of equipment.
c.
Compare depreciable lives used by the client for various asset categories with those of the industry.
d.
All the above are techniques that auditors can use.
AUDT.JOHN.16.157 – Preliminary Analytical Procedures
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63. Which of the following information should be included in management’s documentation regarding
intangible assets?
a.
Manner of acquisition.
b.
Basis for the capitalized amount
c.
Expected period of benefit.
d.
All the above should be included.
AUDT.JOHN.16.134 – Control Risks
64. When performing preliminary analytical procedures related to long-lived assets, which of the following
should the auditor compare the unaudited financial statements with?
a.
Past results.
b.
Industry trends.
c.
Future company projections.
d.
Both A and B.
65. An auditor’s review of the repair expense to identify any capital expenditures is a test related to which
management assertion?
a.
Existence
b.
Completion
c.
Valuation
d.
Rights and Obligation
b
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Long-Lived Assets and Related Expenses
66. Audit procedures should be proportional to which of the following?
a.
Size of the client.
b.
Size of the firm.
c.
The assessed risks.
d.
The assessed misstatements.
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AUDT.JOHN.16.159 – Responding to Risks of Material Misstatement
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67. Which is the primary assertion tested in conjunction with obtaining evidence regarding impairment?
a.
Valuation.
b.
Cutoff.
c.
Existence.
d.
Rights.
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AUDT.JOHN.16.136 – Substantive Audit Procedures
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68. If the auditor is testing the reasonableness of depreciation expense for the year, which assertion is being
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Chapter 12 – Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal
tested?
a.
Completeness.
b.
Rights and Obligations.
c.
Existence.
d.
Valuation
d
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69. Which of the following is a term used to describe management’s recognition that a significant portion of
fixed assets is no longer as productive as had originally been expected?
a.
Asset depreciation.
b.
Asset amortization.
c.
Asset impairment.
d.
Asset disposal.
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AUDT.JOHN.16.135 – Inherent Risks
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70. In a tour of a client’s manufacturing facility, the auditor is most likely attempting to satisfy which of the
following management assertions related to long-lived assets?
a.
Completeness.
b.
Existence.
c.
Rights.
d.
Presentation and disclosure.
b
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AUDT.JOHN.16.136 – Substantive Audit Procedures
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71. The auditor selects a sample of asset disposals and examines the sales documentation evidencing disposal of
the equipment and recomputes gain or loss on the disposal. This audit steps primarily tests which of the
following assertions for the equipment account?
a.
Existence.
b.
Presentation and disclosure.
Chapter 12 – Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal
c.
Rights.
d.
Valuation.
d
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AUDT.JOHN.16.136 – Substantive Audit Procedures
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72. Which one of the following does not constitute a probable relationship between accounts?
a.
Equipment and depreciation.
b.
Patent and amortization.
c.
Assets under capital leases and amortization.
d.
Oil reserves and depreciation.
d
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AUDT.JOHN.16.157 – Preliminary Analytical Procedures
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73. Reconciling the physical asset inventory with the property ledger on a periodic basis is a control related to
which management assertion?
a.
Completeness.
b.
Rights and Obligations.
c.
Existence.
d.
Valuation
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AUDT.JOHN.16.134 – Control Risks
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74. If the auditor is performing substantive procedure to determine whether the long-lived asset balance is
reflected on the balance sheet in the noncurrent section, which of the following assertions is being tested?
a.
Existence.
b.
Completeness.
c.
Presentation and Disclosure.
d.
Rights and Obligations.
1
75. A client has implemented a policy requiring the establishment and enforcement of property management
training for all personnel involved in the use, stewardship, and management of equipment. Which of the
following is not a test that could be used in testing the control?
a.
Inquiry.
b.
Observation.
c.
Inspection of documentation.
d.
Review financial statements.
d
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AUDT.JOHN.16.137 – Tests of Controls
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76. The auditor performs substantive procedures related to property, plant and equipment to determine if the
assets have been pledged as collateral or title has transferred. What is the primary assertion the auditor is
testing?
a.
Valuation.
b.
Rights.
c.
Completeness.
d.
Existence.
b
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Long-Lived Assets and Related Expenses
77. Which of the following assertions are usually the two most relevant assertions related to long-lived assets?
a.
Existence and Presentation.
b.
Completeness and Existence.
c.
Existence and Valuation.
d.
Valuation and Completeness.
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AUDT.JOHN.16.156 – Significant Accounts, Disclosures, and Relevant Assertions
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78. If the auditor is testing long-lived asset account balances to see if they include all relevant transactions that
have taken place during the period, what is the primary assertion being tested?
a.
Presentation and Disclosure.
Chapter 12 – Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal
b.
Existence.
c.
Completeness.
d.
Valuation.
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AUDT.JOHN.16.136 – Substantive Audit Procedures
79. Which of the following procedures is not a procedure used by an auditor in searching for unrecorded
disposals of long-lived assets?
a.
Make client inquiries.
b.
Examine property tax records.
c.
Send confirmations to insurance agents.
d.
Examine scrap sales accounts.
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Long-Lived Assets and Related Expenses
80. Which of the following procedures is a substantive procedure that relates to the rights and obligations
assertion?
a.
Assess management’s impairment estimates.
b.
Examine documents of title.
c.
Recalculate amortization expense.
d.
Inquire management about assets that are idle.
b
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81. As natural resources are used up the client has to recognize which of the following types of expense?
a.
Depreciation expense.
b.
Depletion expense.
c.
Amortization expense.
d.
Reclamation expense.
82. After a natural resource such as gas or coal is used up by the client, the client is responsible for restoring the
land to its original condition. What is the cost of this restoration called?
a.
Impairment expense.
b.
Depletion expense.
c.
Amortization expense.
d.
Reclamation expense.
d
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Identify and Assess Inherent Risks Associated with Long-Lived Assets
83. Which of the following items is not used by natural resource companies to estimate the asset value of
natural resources over the life of the resource, e.g., oil or coal?
a.
Reserves.
b.
Depletion rate.
c.
Reclamation expense.
d.
Restoration rate
d
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Identify and Assess Inherent Risks Associated with Long-Lived Assets
84. Which of the following procedures is not a substantive procedure used for testing the valuation of long-lived
assets?
a.
Assess management’s impairment estimates.
b.
Inquire of management about assets that are idle.
c.
Develop an independent estimate of amortization expense.
d.
All of the above are procedures used for testing the valuation assertion.
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AUDT.JOHN.16.156 – Significant Accounts, Disclosures, and Relevant Assertions
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85. Which of the following controls is not a typical internal control over fixed assets?
a.
Reconcile physical inventory with the property ledger.
b.
Periodically reassess the appropriateness of depletion categories.
c.
Identify obsolete or scrapped equipment and write it down to scrap value.
d.
Periodically review management strategy and systematically assess the impairment of assets.
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86. Which of the following controls is not a typical internal control over intangible assets?
a.
Procedures to provide reasonable assurance that decisions are appropriately made as to when to
capitalize or expense research and development expenditures.
b.
Development of amortization schedules that reflect the remaining useful life of patents or copyrights
associated with the assets.
c.
Procedures to identify and account for intangible asset impairment.
d.
All of the above are typical controls for intangible assets.
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87. Which of the following are not included in a fixed-asset ledger?
a.
List of all the assets.
b.
Estimated useful life.
c.
Salvage value.
d.
All the above are included.
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88. Which statement is true about a company’s choice of capitalization policy?
a.
All assets with a useful life of more than one year must be capitalized.
b.
The company’s policy must meet the minimum capitalization amounts established by GAAP.
c.
The company’s policy is determined relative to materiality and the cost of maintaining asset records.
d.
The company may elect to capitalize operating expenses which exceed the minimum threshold for
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Chapter 12 – Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal
asset capitalization.
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Obtaining Substantive Evidence about Accounts, Disclosures, and Assertions for
Long-Lived Assets and Related Expenses
89. Which of the following procedures is not a fraud-related audit procedure used to respond to identified fraud
risk factors?
a.
Physically inspect tangible assets, including major additions, and agree serial numbers with invoices
or other supporting documents.
b.
Use the work of a specialist for asset valuations, including impairments.
c.
Confirm the terms of significant additions of property or intangibles with other parties involved in
the transaction.
d.
All of the above are fraud-related audit procedures.
AUDT.JOHN.16.136 – Substantive Audit Procedures
90. If no control deficiencies are identified, how will the extent of substantive testing required differ from a
setting where deficiencies in internal control were identified?
a.
The extent of testing will be more.
b.
The extent of testing will be less.
c.
The extent of testing will be the same in the two settings.
d.
The extent of testing is not affect by control deficiencies.
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91. Repairs and maintenance
Assume that an auditor determines that a client’s policy related to recording repairs and maintenance is
reasonable, but the auditor has concerns about whether the policy is adhered to. What might cause such
concerns and how will the auditor adjust the substantive procedures to be performed?
92. Relevant assertions for long-lived assets
List the five management assertions relevant for long-lived assets and explain how each one is relevant.
93. Audit approach for leases
Describe the substantive procedures typically used to test leases.
94. Fraud Risks
List potential fraud schemes related to long-lived assets.
95. Control Risks
What are some typical controls that affect multiple assertions for long-lived assets?
96. Asset impairment
Describe what is meant by asset impairment and explain where inherent risks related to asset impairment stems
from.
97. Intangible assets – patents
Define what is meant by the term intangible asset, provide an example and identify typical controls over
intangible assets.