TEST 2
1. Which of the following is the primary purpose of auditing fixed assets in a
company?
A) To assess the quality of the assets
B) To verify the existence, valuation, and accuracy of assets
C) To ensure assets are fully depreciated
D) To determine if assets are of high quality
2. When auditing property, plant, and equipment, an auditor is primarily concerned
with which of the following assertions?
A) Completeness, existence, and valuation
B) Ownership and classification
C) Disclosure and rights
D) Liquidity and profitability
3. Which audit procedure would best help an auditor confirm the existence of a
company's property, plant, and equipment?
A) Reviewing property depreciation schedules
B) Inspecting the physical existence of property
C) Reviewing insurance policies for property
D) Recalculation of depreciation expenses
4. When performing an audit of property, plant, and equipment, which of the
following would be the most important document to confirm ownership?
A) Invoices for purchases of assets
B) Title deeds or property registration documents
C) Property maintenance records
D) Depreciation schedules
5. An auditor determines that a company has not recorded some of its recently
purchased equipment. This is a concern related to which audit assertion?
A) Existence
B) Completeness
C) Accuracy
D) Valuation
6. In the audit of fixed assets, revaluation of assets may be conducted to:
A) Increase the depreciation rate of assets
B) Adjust the carrying value of assets to reflect fair value
C) Improve cash flow by selling assets
D) Reduce the company’s tax liability
7. The auditor should ensure that repairs and maintenance expenses are:
A) Capitalized as part of the asset cost
B) Expensed in the period incurred
C) Deferred until the asset is sold
D) Transferred to a revaluation reserve
8. An impairment loss on property, plant, and equipment indicates:
A) An increase in the value of an asset
B) An unrecoverable decline in asset value
C) A need for more frequent depreciation
D) The sale of an asset is imminent
9. Which of the following would most likely indicate a need for impairment testing
of an asset?
A) The asset is fully depreciated
B) Market value of the asset has significantly declined
C) Asset’s usage remains unchanged
D) Asset maintenance costs are stable
10. When an auditor assesses whether the depreciation methods and useful lives of
property are reasonable, they are most directly addressing which assertion?
A) Existence
B) Completeness
C) Valuation
D) Rights and Obligations
11. An online retailer (Rom.com) is of college and professional sports team
memorabilia, such as hats, shirts, pennants, and other sports logo products.
Consumers select the college or professional team from a pull-down menu on the
company’s Web site. For each listed team, the Web site provides a product
description, picture, and price for all products sold online. Customers click on the
product number of the items they wish to purchase. The following are internal
controls Rom.com has established for its online sales:
a. The online sales system is linked to the perpetual inventory system that verifies
quantities on hand before processing the sale.
b. Only products shown on the Web site can be purchased online. Other company
products not shown on the Web site listing are unavailable for online sale.
12. Before the sale is authorized, Rom.com obtains credit card authorization codes
electronically from the credit card agency.
Required:
a. For each control, identify the transaction-related audit objective(s) being
fulfilled if each control is in effect.
b. For each control, describe potential financial misstatements that could occur if
the control was not present.
13. The following misstatements are included in the accounting records of
Leminho Manufacturing Company.
a. Each month, a fraudulent receiving report is submitted to accounting by an
employee in the receiving department. A few days later, he sends Westgate an
invoice for the quantity of goods ordered from a small company he owns and
operates in the evening. A check is prepared, and the amount is paid when the
receiving report and the vendor’s invoice are matched by the accounts payable
clerk.
b. Acquisitions of raw materials are often not recorded until several weeks after the
goods are received because receiving personnel fail to forward receiving reports to
accounting. When pressure from a vendor’s credit department is put on Westgate’s
accounting department, it searches for the receiving report, records the transactions
in the acquisitions journal, and pays the bill.
Required:
a. For each misstatement, identify the transaction-related audit objective that was
not met.
b. For each misstatement, state a control that should have prevented it from
occurring on a continuing basis.
c. For each misstatement, state a substantive audit procedure that could uncover it.
