Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion Chapter 13 Property, Plant, and Equipment: Depreciation and Depletion True / False Questions The auditors' approach to the audit of property, plant and equipment largely results from the fact that relatively few transactions occur True False A major control procedure related to plant and equipment is a budget for depreciation True False Evidence of continued ownership of property is obtained by vouching payments to a mortgage trustee True False The auditors typically observe all major items of property, plant and equipment every year True False Material purchases of assets from an affiliated company should be disclosed in the financial statements True False Idle equipment will generally need to be reclassified as a current asset True False The primary purpose of internal control over plant and equipment is to safeguard the assets from theft True False 13-1 Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion A typical procedure in the audit of property is examination of public records to verify the ownership of the property True False Even when internal control is weak, a significant portion of the audit work on property, plant and equipment may be performed at an interim date True False 10 In the audit of depletion the auditors must often rely on the work of specialists True False Multiple Choice Questions 11 An auditor has identified numerous debits to accumulated depreciation of equipment Which of the following is most likely? A The estimated remaining useful lives of equipment were increased B Plant assets were retired during the year C The prior year's deprecation expense was erroneously understated D Overhead allocations were revised at year-end 12 In testing for unrecorded retirements of equipment, an auditor might A Select items of equipment from the accounting records and then attempt to locate them during the plant tour B Compare depreciation expense with the prior year's depreciation expense C Trace equipment items observed during the plant tour to the equipment subsidiary ledger D Scan the general journal for unusual equipment retirements 13 A plant manager would be most likely to provide information on which of the following? A Adequacy of the provision for uncollectible accounts B Appropriateness of physical inventory valuation techniques C Existence of obsolete inventory D Deferral of certain purchases of office supplies 13-2 Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion 14 Which of the following would be least likely to address control over the initiation and execution of equipment transactions? A Requests for major repairs are approved by a higher level than the department initiating the request B Prenumbered purchase orders are used for equipment and periodically accounted for C Requests for purchases of equipment are reviewed for consideration of soliciting competitive bids D Procedures exist to restrict access to equipment 15 When there are numerous property and equipment transactions during the year, an auditor who plans to assess control risk at a low level usually performs: A Tests of controls and extensive tests of property and equipment balances at the end of the year B Analytical procedures for current year property and equipment transactions C Tests of controls and limited tests of current year property and equipment transactions D Analytical procedures for property and equipment balances at the end of the year 16 Which of the following best describes the auditors' approach to the audit of the ending balance of property, plant and equipment for a continuing nonpublic client? A Direct audit of the ending balance B Agreement of the beginning balance to prior year's working papers and audit of significant changes in the accounts C Audit of changes in the accounts since inception of the company D Audit of selected purchases and retirements for the last few years 17 Which of the following is not a control that should be established for purchases of equipment? A Establishing a budget for capital acquisitions B Requiring that the department in need of the equipment order the equipment C Requiring that the receiving department receive the equipment D Establishing an accounting policy regarding the minimum dollar amount of purchase that will be considered for capitalization 13-3 Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion 18 Which of the following is not one of the auditors' objectives in auditing depreciation? A Establishing the reasonableness of the client's replacement policy B Establishing that the methods used are appropriate C Establishing that the methods are consistently applied D Establishing the reasonableness of depreciation computations 19 Which of the following is the best evidence of continuous ownership of property? A Examination of the deed B Examination of rent receipts from lessees of the property C Examination of the title policy D Examination of canceled check in payment for the property 20 Which of the following best describes the auditors' typical observation of plant and equipment? A The auditors observe a physical inventory of plant and equipment, annually B The auditors observe all additions to plant and equipment made during the year C The auditors observe all major plant and equipment items in the clients' accounts each year D The auditors observe major additions to plant and equipment made during the year 21 Which of the following is used to obtain evidence that the client's equipment accounts are not understated? A Analyzing repairs and maintenance expense accounts B Vouching purchases of plant and equipment C Recomputing depreciation expense D Analyzing the miscellaneous revenue account 22 Which of the following is not a test primarily used to test property, plant and equipment accounts for overstatement? A Investigation of reductions in insurance coverage B Review of property tax bills C Examination of retirement work orders prepared during the year D Vouching retirements of plant and equipment 13-4 Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion 23 A continuing audit client's property, plant and equipment and accounts receivable accounts have approximately the same year-end balance In this circumstance, when compared to property, plant and equipment one would normally expect the audit of accounts receivable to require: A More audit time B Less audit time C Approximately the same amount of audit time D Similar confirmation procedures 24 When comparing an initial audit with a subsequent year audit for a particular client, the scope of audit procedures for which of the following accounts would be expected to decrease the most? A Accounts receivable B Cash C Marketable securities D Property, plant and equipment 25 When performing an audit of the property, plant and equipment accounts, an auditor should expect which of the following to be most likely to indicate a departure from generally accepted accounting principles? A Repairs have been capitalized to repair equipment that had broken down B Interest has been capitalized for self-constructed assets C Assets have been acquired from affiliated corporations with the related transactions recorded and described in the financial statements D The cost of freight-in on an acquisition has been capitalized 26 The most likely technique for the current year audit of goodwill which was acquired three years ago by a continuing audit client: A Confirmation B Observation C Recomputation D Inquiry 13-5 Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion 27 For which of the following accounts is it most likely that most of the audit work can be performed in advance of the balance sheet date? A Accounts receivable B Cash C Current marketable securities D Property, plant and equipment 28 The auditors may expect a proper debit to goodwill due to: A Purchase of a trademark B Establishment of an extraordinarily profitable product C A business combination D Capitalization of human resources 29 Which of the following is a customary audit procedure for the verification of the legal ownership of real property? A Examination of correspondence with the corporate counsel concerning acquisition matters B Examination of ownership documents registered and on file at a public hall of records C Examination of corporate minutes and resolutions concerning the approval to acquire property, plant and equipment D Examination of deeds and title guaranty policies on hand 30 In violation of company policy, Lowell Company erroneously capitalized the cost of painting its warehouse The auditors examining Lowell's financial statements would most likely detect this when: A Discussing capitalization policies with Lowell's controller B Examining maintenance expense accounts C Observing, during the physical inventory observation, that the warehouse had been painted D Examining the construction work orders supporting items capitalized during the year 13-6 Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion 31 Which of the following best describes the independent auditors' approach to obtaining satisfaction concerning depreciation expense in the income statement? A Verify the mathematical accuracy of the amounts charged to income as a result of depreciation expense B Determine the method for computing depreciation expense and ascertain that is in accordance with generally accepted accounting principles C Reconcile the amount of depreciation expense to those amounts credited to accumulated depreciation accounts D Establish the basis for depreciable assets and verify the depreciation expense 32 The auditors are least likely to learn of retirements of equipment through which of the following? A Review of the purchase returns and allowances account B Review of depreciation C Analysis of the debits to the accumulated depreciation account D Review of insurance policy riders 33 For which of the following ledger accounts would the auditor be most likely to analyze the details to identify understatements of equipment acquisitions? A Service Revenue B Sales C Repairs and maintenance expense D Sales salaries expense 34 Which of the following is the most important control procedure over acquisitions of property, plant, and equipment? A Establishing a written company policy distinguishing between capital and revenue expenditures B Using a budget to forecast and control acquisitions and retirements C Analyzing monthly variances between authorized expenditures and actual costs D Requiring acquisitions to be made by user departments 13-7 Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion 35 In the examination of property, plant, and equipment, the auditor tries to determine all of the following except the: A Extent of the control risk B Extent of property abandoned during the year C Adequacy of replacement funds D Reasonableness of the depreciation 36 Property acquisitions that are misclassified as maintenance expense would most likely be detected by an internal control system that provides for: A Investigation of variances within a formal budgeting system B Review and approval of the monthly depreciation entry by the plant supervisor C Segregation of duties of employees in the accounts payable department D Examination by the internal auditors of vendor invoices and canceled checks for property acquisitions Essay Questions 37 Plant and equipment are not as inherently risky as are other assets, such as inventories and accounts receivable However, a company should still endeavor to maintain effective internal control over plant and equipment a Describe the principal purpose of internal controls relating to plant and equipment b List and describe four major controls applicable to plant and equipment 13-8 Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion 38 Auditors should obtain evidence that there are no significant amounts of unrecorded retirements of property, plant and equipment a Describe two ways that the auditors obtain evidence that there are no significant amounts of unrecorded retirements of property (land) b Describe three ways that the auditors obtain evidence that there are no significant amounts of unrecorded retirements of equipment 13-9 Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion Chapter 13 Property, Plant, and Equipment: Depreciation and Depletion Answer Key True / False Questions The auditors' approach to the audit of property, plant and equipment largely results from the fact that relatively few transactions occur TRUE Difficulty: Easy A major control procedure related to plant and equipment is a budget for depreciation FALSE Difficulty: Medium Evidence of continued ownership of property is obtained by vouching payments to a mortgage trustee TRUE Difficulty: Medium The auditors typically observe all major items of property, plant and equipment every year FALSE Difficulty: Medium 13-10 Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion Material purchases of assets from an affiliated company should be disclosed in the financial statements TRUE Difficulty: Easy Idle equipment will generally need to be reclassified as a current asset FALSE Difficulty: Easy The primary purpose of internal control over plant and equipment is to safeguard the assets from theft FALSE Difficulty: Medium A typical procedure in the audit of property is examination of public records to verify the ownership of the property FALSE Difficulty: Hard Even when internal control is weak, a significant portion of the audit work on property, plant and equipment may be performed at an interim date TRUE Difficulty: Hard 10 In the audit of depletion the auditors must often rely on the work of specialists TRUE Difficulty: Medium 13-11 Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion Multiple Choice Questions 11 An auditor has identified numerous debits to accumulated depreciation of equipment Which of the following is most likely? A The estimated remaining useful lives of equipment were increased B Plant assets were retired during the year C The prior year's deprecation expense was erroneously understated D Overhead allocations were revised at year-end Difficulty: Hard 12 In testing for unrecorded retirements of equipment, an auditor might A Select items of equipment from the accounting records and then attempt to locate them during the plant tour B Compare depreciation expense with the prior year's depreciation expense C Trace equipment items observed during the plant tour to the equipment subsidiary ledger D Scan the general journal for unusual equipment retirements Difficulty: Medium 13 A plant manager would be most likely to provide information on which of the following? A Adequacy of the provision for uncollectible accounts B Appropriateness of physical inventory valuation techniques C Existence of obsolete inventory D Deferral of certain purchases of office supplies Difficulty: Medium 13-12 Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion 14 Which of the following would be least likely to address control over the initiation and execution of equipment transactions? A Requests for major repairs are approved by a higher level than the department initiating the request B Prenumbered purchase orders are used for equipment and periodically accounted for C Requests for purchases of equipment are reviewed for consideration of soliciting competitive bids D Procedures exist to restrict access to equipment Difficulty: Hard 15 When there are numerous property and equipment transactions during the year, an auditor who plans to assess control risk at a low level usually performs: A Tests of controls and extensive tests of property and equipment balances at the end of the year B Analytical procedures for current year property and equipment transactions C Tests of controls and limited tests of current year property and equipment transactions D Analytical procedures for property and equipment balances at the end of the year Difficulty: Hard 16 Which of the following best describes the auditors' approach to the audit of the ending balance of property, plant and equipment for a continuing nonpublic client? A Direct audit of the ending balance B Agreement of the beginning balance to prior year's working papers and audit of significant changes in the accounts C Audit of changes in the accounts since inception of the company D Audit of selected purchases and retirements for the last few years Difficulty: Medium 13-13 Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion 17 Which of the following is not a control that should be established for purchases of equipment? A Establishing a budget for capital acquisitions B Requiring that the department in need of the equipment order the equipment C Requiring that the receiving department receive the equipment D Establishing an accounting policy regarding the minimum dollar amount of purchase that will be considered for capitalization Difficulty: Medium 18 Which of the following is not one of the auditors' objectives in auditing depreciation? A Establishing the reasonableness of the client's replacement policy B Establishing that the methods used are appropriate C Establishing that the methods are consistently applied D Establishing the reasonableness of depreciation computations Difficulty: Easy 19 Which of the following is the best evidence of continuous ownership of property? A Examination of the deed B Examination of rent receipts from lessees of the property C Examination of the title policy D Examination of canceled check in payment for the property Difficulty: Hard 20 Which of the following best describes the auditors' typical observation of plant and equipment? A The auditors observe a physical inventory of plant and equipment, annually B The auditors observe all additions to plant and equipment made during the year C The auditors observe all major plant and equipment items in the clients' accounts each year D The auditors observe major additions to plant and equipment made during the year Difficulty: Medium 13-14 Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion 21 Which of the following is used to obtain evidence that the client's equipment accounts are not understated? A Analyzing repairs and maintenance expense accounts B Vouching purchases of plant and equipment C Recomputing depreciation expense D Analyzing the miscellaneous revenue account Difficulty: Hard 22 Which of the following is not a test primarily used to test property, plant and equipment accounts for overstatement? A Investigation of reductions in insurance coverage B Review of property tax bills C Examination of retirement work orders prepared during the year D Vouching retirements of plant and equipment Difficulty: Hard 23 A continuing audit client's property, plant and equipment and accounts receivable accounts have approximately the same year-end balance In this circumstance, when compared to property, plant and equipment one would normally expect the audit of accounts receivable to require: A More audit time B Less audit time C Approximately the same amount of audit time D Similar confirmation procedures Difficulty: Medium 13-15 Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion 24 When comparing an initial audit with a subsequent year audit for a particular client, the scope of audit procedures for which of the following accounts would be expected to decrease the most? A Accounts receivable B Cash C Marketable securities D Property, plant and equipment Difficulty: Medium 25 When performing an audit of the property, plant and equipment accounts, an auditor should expect which of the following to be most likely to indicate a departure from generally accepted accounting principles? A Repairs have been capitalized to repair equipment that had broken down B Interest has been capitalized for self-constructed assets C Assets have been acquired from affiliated corporations with the related transactions recorded and described in the financial statements D The cost of freight-in on an acquisition has been capitalized Difficulty: Medium 26 The most likely technique for the current year audit of goodwill which was acquired three years ago by a continuing audit client: A Confirmation B Observation C Recomputation D Inquiry Difficulty: Medium 13-16 Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion 27 For which of the following accounts is it most likely that most of the audit work can be performed in advance of the balance sheet date? A Accounts receivable B Cash C Current marketable securities D Property, plant and equipment Difficulty: Medium 28 The auditors may expect a proper debit to goodwill due to: A Purchase of a trademark B Establishment of an extraordinarily profitable product C A business combination D Capitalization of human resources Difficulty: Medium 29 Which of the following is a customary audit procedure for the verification of the legal ownership of real property? A Examination of correspondence with the corporate counsel concerning acquisition matters B Examination of ownership documents registered and on file at a public hall of records C Examination of corporate minutes and resolutions concerning the approval to acquire property, plant and equipment D Examination of deeds and title guaranty policies on hand Difficulty: Medium Source: AICPA 30 In violation of company policy, Lowell Company erroneously capitalized the cost of painting its warehouse The auditors examining Lowell's financial statements would most likely detect this when: A Discussing capitalization policies with Lowell's controller B Examining maintenance expense accounts C Observing, during the physical inventory observation, that the warehouse had been painted D Examining the construction work orders supporting items capitalized during the year Difficulty: Medium Source: AICPA 13-17 Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion 31 Which of the following best describes the independent auditors' approach to obtaining satisfaction concerning depreciation expense in the income statement? A Verify the mathematical accuracy of the amounts charged to income as a result of depreciation expense B Determine the method for computing depreciation expense and ascertain that is in accordance with generally accepted accounting principles C Reconcile the amount of depreciation expense to those amounts credited to accumulated depreciation accounts D Establish the basis for depreciable assets and verify the depreciation expense Difficulty: Medium Source: AICPA 32 The auditors are least likely to learn of retirements of equipment through which of the following? A Review of the purchase returns and allowances account B Review of depreciation C Analysis of the debits to the accumulated depreciation account D Review of insurance policy riders Difficulty: Hard Source: AICPA 33 For which of the following ledger accounts would the auditor be most likely to analyze the details to identify understatements of equipment acquisitions? A Service Revenue B Sales C Repairs and maintenance expense D Sales salaries expense Difficulty: Medium Source: AICPA 13-18 Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion 34 Which of the following is the most important control procedure over acquisitions of property, plant, and equipment? A Establishing a written company policy distinguishing between capital and revenue expenditures B Using a budget to forecast and control acquisitions and retirements C Analyzing monthly variances between authorized expenditures and actual costs D Requiring acquisitions to be made by user departments Difficulty: Medium Source: AICPA 35 In the examination of property, plant, and equipment, the auditor tries to determine all of the following except the: A Extent of the control risk B Extent of property abandoned during the year C Adequacy of replacement funds D Reasonableness of the depreciation Difficulty: Easy Source: AICPA 36 Property acquisitions that are misclassified as maintenance expense would most likely be detected by an internal control system that provides for: A Investigation of variances within a formal budgeting system B Review and approval of the monthly depreciation entry by the plant supervisor C Segregation of duties of employees in the accounts payable department D Examination by the internal auditors of vendor invoices and canceled checks for property acquisitions Difficulty: Medium Source: AICPA 13-19 Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion Essay Questions 37 Plant and equipment are not as inherently risky as are other assets, such as inventories and accounts receivable However, a company should still endeavor to maintain effective internal control over plant and equipment a Describe the principal purpose of internal controls relating to plant and equipment b List and describe four major controls applicable to plant and equipment a The principal purpose of internal controls relating to plant and equipment is to obtain maximum efficiency from the dollars invested in plant assets b The following are major internal controls for plant and equipment (only four required): • Use of a plant budget to forecast and control acquisitions and retirements • Maintaining subsidiary ledger of property • Establishing a system of authorizations for acquisitions • A written statement of company policy distinguishing between capital and revenue expenditures • A policy requiring all purchases of plant and equipment through normal purchasing and receiving procedures • Periodic physical inventories • A system of retirement procedures, including serially numbered retirement work orders Difficulty: Hard 13-20 Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion 38 Auditors should obtain evidence that there are no significant amounts of unrecorded retirements of property, plant and equipment a Describe two ways that the auditors obtain evidence that there are no significant amounts of unrecorded retirements of property (land) b Describe three ways that the auditors obtain evidence that there are no significant amounts of unrecorded retirements of equipment a The auditors obtain evidence that there are no significant amounts of unrecorded retirements of property by (only two required): • Examination of property tax bills • Vouching rent receipts from lessees • Examination of payments to mortgagee or trustee b The auditors obtain evidence that there are no significant amounts of unrecorded retirements of equipment by (only three required): • For major purchases, investigate related retirements • Analyze the Miscellaneous Revenue account to locate cash proceeds from sale of equipment • For discontinued operations, investigate related retirements • Inquire of executives and supervisors • Investigate reductions in insurance coverage Difficulty: Hard 13-21 ... evidence that there are no significant amounts of unrecorded retirements of equipment 13- 9 Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion Chapter 13 Property, Plant, and. .. expenditures and actual costs D Requiring acquisitions to be made by user departments 13- 7 Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion 35 In the examination of property, plant, ... applicable to plant and equipment 13- 8 Chapter 13 - Property, Plant, and Equipment: Depreciation and Depletion 38 Auditors should obtain evidence that there are no significant amounts of unrecorded retirements