Chapter 12 – Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal
1. Long-lived assets only include the tangible assets of an organization.
a.
True
b.
False
False
AUDT.JOHN.16.156 – Significant Accounts, Disclosures, and Relevant Assertions
2. Long-lived assets typically represent the smallest single category of assets in many organizations.
a.
True
b.
False
False
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AUDT.JOHN.16.156 – Significant Accounts, Disclosures, and Relevant Assertions
United States – AK – AICPA BB-Critical thinking
3. Much of the inherent risk related to long-lived assets is due to the importance of management estimates.
a.
True
b.
False
True
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AUDT.JOHN.16.135 – Inherent Risks
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4. The auditor’s procedures should include a determination as to whether tangible assets have reasonable useful
lives.
a.
True
b.
False
5. Gains on the sale of equipment usually indicate that the depreciation lives of the assets are too long.
a.
True
b.
False
6. To identify any possible impairment of manufacturing equipment, the auditor can tour the facility during
operations to determine if any of the machines are idle.
a.
True
b.
False
True
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AUDT.JOHN.16.157 – Preliminary Analytical Procedures
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7. Internal controls over fixed assets should provide reasonable assurance that all purchases are authorized and
reasonably valued.
a.
True
b.
False
True
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AUDT.JOHN.16.134 – Control Risks
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8. An inherent risk related to asset impairment is management is not typically interested in writing down the
asset value.
a.
True
b.
False
True
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AUDT.JOHN.16.135 – Inherent Risks
United States – AK – AICPA BB-Critical thinking
9. The client should have methods in place to identify and account for intangible-asset impairments.
a.
True
b.
False
True
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AUDT.JOHN.16.134 – Control Risks
10. A common technique used to fraudulently misstate financial statements involves the understatement of
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Chapter 12 – Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal
long-lived assets through undervaluing existing long-lived assets.
a.
True
b.
False
False
AUDT.JOHN.16.138 – Fraud Risks
11. The auditor would be most likely to request a schedule of repairs and maintenance expense to satisfy the
auditor about the existence of long-lived assets.
a.
True
b.
False
12. The auditor would be most likely review the depreciation policy and test depreciation calculations to satisfy
the auditor about the valuation of long-lived assets.
a.
True
b.
False
13. The existence of fair value estimates that are unreasonable or unsupportable is indicative of a potential fraud
scheme.
a.
True
b.
False
True
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AUDT.JOHN.16.138 – Fraud Risks
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14. The auditor typically makes a physical inspection of most of the material fixed asset acquisitions.
a.
True
b.
False
False
15. An auditor is required to gain an overall understanding of internal controls related to long-lived assets for
integrated audits, but NOT for financial statement only audits.
a.
True
b.
False
False
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AUDT.JOHN.16.134 – Control Risks
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16. Asset impairment is not typically assessed by the independent auditor since it is a subjective management
estimate.
a.
True
b.
False
17. Knowledge of industry product trends is crucial to the auditor’s identification of the potential for the
impairment of assets.
a.
True
b.
False
False
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Long-Lived Assets and Related Expenses
18. When the value of a long-lived asset has been impaired, the organization must write down the asset
reflecting the decline in economic benefit of the asset.
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AUDT.JOHN.16.12-08 – LO: 12-08
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Long-Lived Assets and Related Expenses
Chapter 12 – Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal
a.
True
b.
False
True
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AUDT.JOHN.16.135 – Inherent Risks
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19. When an organization disposes of a long-lived asset it should determine and record the gain or loss on the
disposal of the asset.
a.
True
b.
False
True
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AUDT.JOHN.16.156 – Significant Accounts, Disclosures, and Relevant Assertions
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20. Once the auditor obtains a fixed asset additions schedule from the client, the first audit procedure to perform
is to test the existence of recorded additions.
a.
True
b.
False
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AUDT.JOHN.16.12-08 – LO: 12-08
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Long-Lived Assets and Related Expenses
21. Effective internal controls over long-lived assets include the use of identification tags secured to assets for
proper tracking.
a.
True
b.
False
True
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AUDT.JOHN.16.134 – Control Risks
22. Estimating the amount of reclamation costs are an inherent risk associated with natural resources.
a.
True
b.
False
True
AUDT.JOHN.16.135 – Inherent Risks
23. An inherent risk associated with intangible assets such as a patent is the accounting for research and
development costs
a.
True
b.
False
True
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AUDT.JOHN.16.135 – Inherent Risks
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24. Brown, Inc. obtained a patent for its product five years ago and should expense the entire amount of the
unamortized balance if the product is no longer sold.
a.
True
b.
False
True
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AUDT.JOHN.16.135 – Inherent Risks
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25. Limited physical access to long-lived assets is a typical internal control that affects multiple assertions for
long-lived assets.
a.
True
b.
False
True
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AUDT.JOHN.16.134 – Control Risks
United States – AK – AICPA BB-Critical thinking
26. It is not important for an organization to have controls to track the location, quantity, condition,
maintenance, and deprecation status of their long-lived assets as the external auditor gathers evidence related to
these issues.
a.
True
Chapter 12 – Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal
b.
False
False
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AUDT.JOHN.16.134 – Control Risks
27. Auditors must employ independent geologists to evaluate management’s estimate of the reserves contained
in a new discovery of natural resources.
a.
True
b.
False
True
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AUDT.JOHN.16.12-08 – LO: 12-08
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Long-Lived Assets and Related Expenses
28. Natural resource companies cannot reassess the amount of reserves even if more information becomes
available during the course of mining, harvesting, or extracting resources.
a.
True
b.
False
False
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AUDT.JOHN.16.134 – Control Risks
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29. When planning the audit procedures related to long-lived assets, the auditor is required to perform
preliminary analytical procedures.
a.
True
b.
False
True
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AUDT.JOHN.16.157 – Preliminary Analytical Procedures
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30. Auditors do NOT need to know the business and economics of the business in order to perform meaningful
preliminary analytical procedures.
a.
True
Chapter 12 – Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal
b.
False
False
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AUDT.JOHN.16.157 – Preliminary Analytical Procedures
31. If preliminary analytical procedures identify some unexpected relationships, the auditor would conclude that
there may be a heightened risk of material misstatements.
a.
True
b.
False
True
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Long-Lived Assets
32. Auditors will perform an analysis of leases using FASB’s Codified Standards (ASC) criteria to substantiate
the accounting treatment.
a.
True
b.
False
33. Auditors often recalculate the present value of capital lease agreements to assess whether the relevant
criteria for capitalizing the lease have been met.
a.
True
b.
False
34. If unusual or unexpected relationships related to long-lived assets are identified during preliminary
analytical procedures, the planned audit procedures (tests of controls, substantive procedures) would be adjusted
to address the risk of material misstatement.
Chapter 12 – Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal
a.
True
b.
False
True
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AUDT.JOHN.16.157 – Preliminary Analytical Procedures
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35. An auditor should compare the unaudited financial statements with both past results and industry trends to
gain an indication about the possibility of fraud.
a.
True
b.
False
True
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AUDT.JOHN.16.157 – Preliminary Analytical Procedures
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36. It is simple for auditors to test the costs capitalized for discovery of natural resources because only
successful efforts may be recorded
a.
True
b.
False
37. The obsolescence of long-lived assets is an inherent risk that should be considered by the auditor.
a.
True
b.
False
True
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Performing Risk Assessment Procedures for Long-Lived Assets
38. Changes in the depreciable lives of equipment may be identified through a substantive audit procedure that
includes analyzing depreciation expense as a percent of assets.
a.
True
b.
False
Chapter 12 – Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal
39. Audit firms should NOT customize the audit programs based on the assessment of the risk of material
misstatement when auditing long-lived assets.
a.
True
b.
False
False
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AUDT.JOHN.16.158 – Responding to Identified Risks of Material Misstatement
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40. If a company has only a few long-lived assets of relatively high value, the most efficient approach for an
auditor would be to use tests of details for obtaining evidence.
a.
True
b.
False
True
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41. The risk of material misstatement related to the existence of long-lived assets at Client A is considered low,
while this risk at Client B is considered high. Sufficiency of evidence for testing the existence of equipment
would be higher for client B.
a.
True
b.
False
True
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AUDT.JOHN.16.158 – Responding to Identified Risks of Material Misstatement
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42. An inherent risk related to long-lived assets is the incomplete recording of disposals.
a.
True
b.
False
43. For integrated audits, the auditor will test the operating effectiveness of important controls as of the client’s
year end.
a.
True
b.
False
True
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AUDT.JOHN.16.137 – Tests of Controls
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44. The auditor selects entity-wide controls for testing, but NOT transaction controls specific to long-lived
assets.
a.
True
b.
False
False
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AUDT.JOHN.16.137 – Tests of Controls
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45. If control deficiencies related to long-lived assets are identified, the auditor will automatically assess those
deficiencies as significant deficiencies.
a.
True
b.
False
False
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AUDT.JOHN.16.137 – Tests of Controls
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46. Which one of the following factors is not an inherent risk associated with long-lived assets?
a.
Obsolescence of assets.
b.
Impairment of assets.
c.
Incomplete recording of disposals.
d.
Lack of physical controls over the long-lived assets.
d
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47. Which one of the following approaches does not represent how the auditor will become aware of risks
associated with long-lived assets?
a.
Obtaining knowledge of the client business.
b.
Reviewing the business plan related to major acquisitions.
c.
Reviewing the minutes of board of directors’ meetings.
d.
All represent how the auditor will become aware of risks associated with long-lived assets and
related expenses.
AUDT.JOHN.16.135 – Inherent Risks
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48. Assume that the audit team notes the client has made a significant change in its product line which requires
that new equipment be purchased. Which of the following would be of greatest concern to the auditor?
a.
Inappropriate book value of new equipment.
b.
Impaired value of new equipment.
c.
Impaired value of old equipment.
d.
Inappropriate depreciation calculation for new equipment.
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49. Which of the following factors is not an inherent risk factor related to asset impairment?
a.
Management is normally not interested in identifying and writing down assets.
b.
Sometimes management wants to write down every potentially impaired asset to a minimum
realizable value.
c.
Determining asset impairment requires a good information system, a systematic process, goods
controls, and professional judgment.
d.
All of the above are inherent risk factors.
AUDT.JOHN.16.135 – Inherent Risks
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50. The tour of the manufacturing plant may best assist the auditor in determining which of the following?
a.
Whether all purchases are authorized.
b.
Whether any machinery is inoperative in the production cycle.
c.
Management’s strategy for assessing impairment.
Chapter 12 – Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal
d.
Estimates of depreciation expense.
b
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AUDT.JOHN.16.157 – Preliminary Analytical Procedures
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51. Which one of the following is not a management assertion relevant to long-lived assets?
a.
Existence.
b.
Completeness.
c.
Valuation.
d.
Reporting.
d
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AUDT.JOHN.16.156 – Significant Accounts, Disclosures, and Relevant Assertions
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52. Which of the following statement is true?
a.
Intangible assets should be recorded at fair market value.
b.
Intangible assets should be recorded at cost.
c.
Intangible assets should be recorded at future market value.
d.
Intangible assets should not be recorded.
b
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AUDT.JOHN.16.135 – Inherent Risks
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53. Which of the following is not a circumstance indicating potential impairment of intangible assets?
a.
A change in circumstances, such as the legal environment or business climate that could affect the
asset’s value.
b.
An accumulation of costs that are significantly in excess of the amount originally expected to be
needed to acquire or construct the asset.
c.
The asset generates just as much cash flow as in the past.
d.
Losses or projections indicating continuing losses associated with an asset used to generate revenue.
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AUDT.JOHN.16.135 – Inherent Risks
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54. Which of the following expense accounts is associated with intangible assets with a definite life?
Chapter 12 – Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal
a.
Depletion expense.
b.
Depreciation expense.
c.
Amortization expense.
d.
None of the above.
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AUDT.JOHN.16.156 – Significant Accounts, Disclosures, and Relevant Assertions
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55. Which of the following expense accounts is associated with natural resources? ?
a.
Depreciation expense.
b.
Amortization expense.
c.
Depletion expense.
d.
Capitalization expense.
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AUDT.JOHN.16.156 – Significant Accounts, Disclosures, and Relevant Assertions
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56. Which of the following long-lived assets presents the most difficult in determining its cost?
a.
Equipment.
b.
Inventory.
c.
Patent.
d.
All the above are equally difficult in determining cost.
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AUDT.JOHN.16.135 – Inherent Risks
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57. Which of the following actions is not a potential fraud scheme related to long-lived assets?
a.
Impairment losses on long-lived assets are not recognized.
b.
Costs that should have been expenses are improperly capitalized.
c.
Amortization of intangible assets is miscalculated.
d.
All the above are potential fraud schemes.
d
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