Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!

uip"ent

Chapter 14 Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Property, Plant, and E uip!ent

"rue / False #uestions

1# Prepaid expenses provide econo"ic bene$it $or longer than a ear# %rue False

&# An exa"ple o$ a prepaid account is prepaid interest# %rue False

'# Inherent ris( $or prepaid expenses )ould generall be assessed as lo) because these accounts do not usuall include co"plex transactions# %rue False

4# *ubstantive anal tical procedures are co""onl used to test prepaid accounts# %rue False

+# ,isposition o$ capital assets through sale, exchange, retire"ent, or abandon"ent are transactions that occur in the propert "anage"ent process# %rue False

-# I$ the auditor has detected "isstate"ents in prior audits, the assess"ent o$ inherent ris( $or the propert "anage"ent process )ill usuall be set higher# %rue False

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Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

.# %he propert , plant, and e!uip"ent records $unction should be segregated $ro" the custodial $unction# %rue False

/# *ubstantive anal tical procedures should not be used in the audit o$ propert , plant, and e!uip"ent# %rue False

0# 1evie)ing capital budgets and co"paring the a"ounts spent )ith a"ounts budgeted is an exa"ple o$ a substantive anal tical procedure $or auditing prepaid accounts# %rue False

12# In!uir o$ client personnel and a revie) o$ lease transactions $or the sa"e period can provide evidence on proper cuto$$ $or capital leases# %rue False

11# %he purchase o$ capital assets should be consistent )ith the authori3ation table used b the client to approve such transactions# 4o)ever, no such table is nor"all used $or lease transactions# %rue False

1&# I$ a periodic ph sical inventor o$ propert , plant, and e!uip"ent is ta(en, the individual responsible $or the inventor should be independent o$ the custodial and record-(eeping $unctions# %rue False

1'# I$ an entit has $e) capital asset purchases, it )ill generall not have a $or"al control s ste" over such transactions# %rue False

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Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

14# 5enerall , auditors rel on controls )hen auditing the propert "anage"ent $unction and there$ore less substantive testing is used# %rue False

1+# Assets no longer used in operations are accounted $or in essentiall the sa"e "anner as those used in operations# %rue False

$ultiple Choice #uestions

1-# An auditor t picall sets inherent ris( $or intangible assets at this level A# 6o)# 7# 8oderate# C# 9ero# ,# 4igh#

1.# :hich o$ the $ollo)ing policies constitutes a control )ea(ness related to the ac!uisition o$ $actor e!uip"ent; A# Ac!uisitions are to be "ade through and approved b the depart"ent in need o$ the e!uip"ent# 7# Advance executive approvals are re!uired $or e!uip"ent ac!uisitions# C# <ariances bet)een authori3ed e!uip"ent expenditures and actual costs are to be i""ediatel reported to "anage"ent# ,# ,epreciation policies are revie)ed onl once a ear#

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Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

1/# :hich o$ the $ollo)ing !uestions )ould an auditor least li(el include on an internal control !uestionnaire concerning the initiation and execution o$ e!uip"ent transactions; A# Are re!uests $or "a=or repairs approved at a higher level than the depart"ent initiating the re!uest; 7# Are prenu"bered purchase orders used $or e!uip"ent and periodicall accounted $or; C# Are re!uests $or purchases o$ e!uip"ent revie)ed $or consideration o$ soliciting co"petitive bids; ,# Are procedures in place to "onitor and properl restrict access to e!uip"ent;

10# %he auditor is "ost li(el to see( in$or"ation $ro" the plant "anager )ith respect to the A# Ade!uac o$ the provision $or uncollectible accounts# 7# Appropriateness o$ ph sical inventor observation procedures# C# Existence o$ obsolete "achiner # ,# ,e$erral or procure"ent o$ certain necessar insurance coverage#

&2# In the exa"ination o$ propert , plant, and e!uip"ent, the auditor tries to deter"ine all o$ the $ollo)ing except the A# Ade!uac o$ controls# 7# Extent o$ propert abandoned, retired, or sold during the ear# C# Ade!uac o$ replace"ent $unds# ,# 1easonableness o$ the depreciation#

&1# %he auditor "a conclude that depreciation charges are insu$$icient b noting A# Insured values greatl in excess o$ boo( values# 7# 6arge a"ounts o$ $ull depreciated assets# C# Continuous trade-ins o$ relativel ne) assets# ,# Excessive recurring losses on assets retired#

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Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

&&# %he auditor is least li(el to learn o$ retire"ent o$ e!uip"ent through )hich o$ the $ollo)ing; A# 1evie)ing the purchase return and allo)ance account# 7# 1evie)ing depreciation# C# Anal 3ing debits to the accu"ulated depreciation account# ,# 1evie)ing insurance polic riders#

&'# :hich o$ the $ollo)ing accounts )ould "ost li(el be revie)ed b the auditor to gain reasonable assurance that additions to propert , plant, and e!uip"ent are not understated; A# ,epreciation expense# 7# Accounts pa able# C# Cash# ,# 1epairs and "aintenance expense#

&4# :hich o$ the $ollo)ing accounts )ould "ost li(el be revie)ed b the auditor to gain reasonable assurance that additions to the e!uip"ent account are not understated; A# 1epairs and "aintenance expense# 7# ,epreciation expense# C# 5ain on disposal o$ e!uip"ent# ,# Accounts pa able#

&+# In auditing intangible assets, an auditor "ost li(el )ould revie) or reco"pute a"orti3ation and deter"ine )hether the a"orti3ation period is reasonable in support o$ "anage"ent>s $inancial state"ent assertion o$ A# <aluation and allocation# 7# Existence# C# Co"pleteness# ,# 1ights and obligations#

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Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

&-# %esting depreciation calculations $or a sa"ple o$ propert , plant, and e!uip"ent tests the assertion o$ A# Existence# 7# Co"pleteness# C# <aluation and allocation# ,# 1ights and obligations#

&.# In testing plant and e!uip"ent balances, an auditor exa"ines ne) additions listed on an anal sis o$ plant and e!uip"ent# %his procedure "ost li(el obtains evidence concerning "anage"ent>s assertion o$ A# Co"pleteness# 7# ?ccurrence# C# Classi$ication# ,# Accurac #

&/# %he cuto$$ assertion $or prepaid insurance A# Is never tested because a"ounts al)a s are i""aterial# 7# Is best tested as part o$ the testing o$ propert and e!uip"ent purchasing# C# Is best tested exclusivel b sending con$ir"ations to vendors# ,# Is best tested b reco"puting the unexpired portion o$ insurance policies in e$$ect#

&0# 1eco"puting the unexpired portion o$ insurance policies in e$$ect tests )hich o$ the $ollo)ing assertions are $or prepaid insurance; A# Existence# 7# Classi$ication# C# 1ights and obligations# ,# <aluation#

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Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

'2# In veri$ ing the a"ount o$ good)ill recorded b a client, the "ost convincing evidence that an auditor can obtain is b co"paring the recorded value o$ assets ac!uired )ith the A# Assessed value as evidenced b tax bills# 7# *eller>s boo( value as evidenced b $inancial state"ents# C# Insured value as evidenced b insurance policies# ,# Appraised value as evidenced b independent appraisals#

'1# %o achieve e$$ective control over $ixed asset additions, a co"pan should establish activities that re!uire A# Capitali3ation o$ the cost o$ $ixed asset additions in excess o$ a speci$ic dollar a"ount# 7# Per$or"ance o$ recurring $ixed asset "aintenance )or( solel b "aintenance depart"ent e"plo ees# C# An $ixed asset additions that are not used in the business to be classi$ied as invest"ents# ,# Authori3ation and approval o$ "a=or $ixed asset additions#

'&# :hich o$ the $ollo)ing constitutes a control )ea(ness related to $actor e!uip"ent; A# A polic re!uiring all purchases o$ $actor e!uip"ent to be "ade b the depart"ent in need o$ the e!uip"ent# 7# Chec(s issued in pa "ent o$ purchases o$ e!uip"ent are not signed b the controller# C# Factor e!uip"ent replace"ents are generall "ade )hen esti"ated use$ul lives, as indicated in depreciation schedules, have expired# ,# Proceeds $ro" sales o$ $ull depreciated e!uip"ent are credited to other inco"e#

''# %o i"prove accountabilit $or $ixed asset retire"ents, "anage"ent "ost li(el )ould i"ple"ent a s ste" o$ internal control that includes A# Continuous anal sis o$ the repairs and "aintenance account# 7# Periodic in!uir o$ plant executives b internal auditors as to )hether an plant assets have been retired# C# Continuous utili3ation o$ se!uentiall nu"bered retire"ent )or( orders# ,# Periodic inspection o$ insurance policies b the internal auditors#

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Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

'4# Co"plex accounting issues $or propert , plant, and e!uip"ent include all o$ the $ollo)ing except A# 6ease accounting# 7# %esting good)ill $or i"pair"ent# C# Capitali3ed interest# ,# *el$-constructed assets#

'+# :hen there are nu"erous propert and e!uip"ent transactions during the ear, an auditor planning to set control ris( at the "ini"u" level usuall plans to obtain an understanding o$ internal control and to per$or" A# %ests o$ controls and extensive tests o$ propert and e!uip"ent balances at the end o$ the ear# 7# Extensive tests o$ current ear propert and e!uip"ent transactions# C# %ests o$ controls and li"ited tests o$ current ear propert and e!uip"ent transactions# ,# Anal tical procedures $or propert and e!uip"ent balances at the end o$ the ear#

'-# E!uip"ent ac!uisitions that are "isclassi$ied as "aintenance expenses "ost li(el )ould be detected b a control activit that provides $or A# *egregation o$ duties o$ e"plo ees in the accounts pa able depart"ent# 7# Independent veri$ication o$ invoices $or disburse"ents recorded as e!uip"ent ac!uisitions# C# Investigation o$ variances )ithin a $or"al budgeting s ste"# ,# Authori3ation b the board o$ directors o$ signi$icant e!uip"ent ac!uisitions#

'.# :hich o$ the $ollo)ing situations has the best chance o$ being detected )hen a CPA co"pares revenues and expenses reported $or the ear being audited @current earA )ith the prior ear and investigates all changes exceeding a $ixed percentage; A# An increase in propert tax rates has not been recogni3ed in the co"pan >s current ear accrual# 7# %he cashier began lapping accounts receivable in the current ear# C# 7ecause o$ )orsening econo"ic conditions, the current ear provision $or uncollectible accounts )as inade!uate# ,# %he co"pan changed its capitali3ation polic $or s"all tools in the current ear#

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Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

'/# %ennessee Co"pan violated co"pan polic b erroneousl capitali3ing the cost o$ painting its )arehouse# %he CPA exa"ining %ennessee>s $inancial state"ents )ould "ost li(el learn o$ this error b A# ,iscussing %ennessee>s capitali3ation policies )ith its controller# 7# 1evie)ing the titles and descriptions $or all construction )or( orders issued during the ear# C# ?bserving during the ph sical inventor observation that the )arehouse has been painted# ,# Exa"ining in detail a sa"ple o$ construction )or( orders#

'0# :hich o$ the $ollo)ing is li(el the "ost e$$ective audit procedure $or the veri$ication o$ the legal o)nership o$ real propert ; A# Exa"ination o$ correspondence )ith the corporate counsel concerning ac!uisitions# 7# Exa"ination o$ o)nership docu"ents registered and on $ile at a public hall o$ records# C# Exa"ination o$ corporate "inutes and resolutions concerning the approval to ac!uire propert , plant, and e!uip"ent# ,# Exa"ination o$ deeds and title guarant policies on hand#

42# A nor"al audit procedure is to anal 3e the current ear>s repairs and "aintenance accounts to provide evidence in support o$ the audit proposition that A# Expenditures $or $ixed assets have been recorded in the proper period# 7# Capital expenditures have been properl authori3ed# C# Boncapitali3able expenditures have been properl expensed# ,# Expenditures $or $ixed assets have been capitali3ed#

41# :hich o$ the $ollo)ing is the best evidence o$ real estate o)nership at the balance sheet date; A# %itle insurance polic # 7# A duplicate o$ the original deed held in the client>s sa$e# C# Paid real estate tax bills# ,# Closing state"ents#

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Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

4&# :hich o$ the $ollo)ing audit procedures )ould be least li(el to lead the auditor to $ind unrecorded $ixed asset disposals; A# Exa"ination o$ insurance policies $or evidence o$ a dropped or cancelled polic # 7# 1evie) o$ repairs and "aintenance expense# C# 1evie) o$ propert tax $iles# ,# *canning o$ invoices $or $ixed asset additions $or evidence o$ a purchase to replace a previousl o)ned $ixed asset#

4'# In testing $or unrecorded retire"ents o$ e!uip"ent, an auditor "ost li(el )ould A# *elect ite"s o$ e!uip"ent $ro" the accounting records and then locate the" during the plant tour# 7# Co"pare depreciation =ournal entries )ith si"ilar prior- ear entries in search o$ $ull depreciated e!uip"ent# C# Inspect ite"s o$ e!uip"ent observed during the plant tour and then trace the" to the e!uip"ent subsidiar ledger# ,# *can the general =ournal $or unusual e!uip"ent additions and excessive debits to repairs and "aintenance expense#

44# An auditor anal 3es repairs and "aintenance accounts pri"aril to obtain evidence in support o$ the audit assertion that all A# Boncapitali3able expenditures $or repairs and "aintenance have been recorded in the proper period# 7# Expenditures $or propert and e!uip"ent have been recorded in the proper period# C# Boncapitali3able expenditures $or repairs and "aintenance have been properl charged to expense# ,# Expenditures $or propert and e!uip"ent have not been charged to expenses#

4+# :hich o$ the $ollo)ing explanations "ight satis$ an auditor )ho discovers signi$icant debits to an accu"ulated depreciation account; A# *everal $ull depreciated assets )ere retired during the ear# 7# Prior ears> depreciation charges )ere erroneousl understated# C# A reserve $or possible loss on retire"ent has been recorded# ,# An asset has been recorded at its $air value#

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Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

4-# In testing plant and e!uip"ent balances, an auditor "a inspect ne) additions listed on the anal sis o$ plant and e!uip"ent# %his procedure is designed to obtain evidence concerning "anage"ent>s assertion@sA about A# Presentation and disclosure# 7# Existence or occurrence# C# 7oth @1A presentation and disclosure and @&A existence and occurrence# ,# Beither @1A presentation and disclosure nor @&A existence and occurrence#

4.# :hich o$ the $ollo)ing explanations "ost li(el )ould satis$ an auditor )ho !uestions "anage"ent about signi$icant debits to the accu"ulated depreciation accounts; A# %he esti"ated re"aining use$ul lives o$ plant assets )ere revised up)ard# 7# Plant assets )ere retired during the ear# C# %he prior ear>s depreciation expense )as erroneousl understated# ,# ?verhead allocations )ere revised at ear-end#

4/# 7 selecting a sa"ple o$ additions to propert , plant, and e!uip"ent and then exa"ining the related vendor invoices, the auditor is testing )hich o$ the $ollo)ing assertions $or propert , plant, and e!uip"ent; A# ?ccurrence# 7# Co"pleteness# C# Cuto$$# ,# Classi$ication#

40# %esting a sa"ple o$ repairs and "aintenance ite"s to ensure that the )ere properl classi$ied as repairs as opposed to propert , plant, and e!uip"ent tests )hich o$ the $ollo)ing assertions $or the propert , plant, and e!uip"ent account; A# ?ccurrence# 7# Co"pleteness# C# Cuto$$# ,# Authori3ation#

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Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

+2# %esting a sa"ple o$ repairs and "aintenance expense ite"s to ensure that the )ere properl classi$ied as repairs as opposed to propert , plant, and e!uip"ent tests )hich o$ the $ollo)ing assertions $or the repairs and "aintenance expense account; A# ?ccurrence# 7# Co"pleteness# C# Cuto$$# ,# Authori3ation#

+1# Auditors )ill exa"ine the insurance register pri"aril to A# Ensure that dollar coverage a"ounts are ade!uate# 7# Exa"ine polic expiration dates to veri$ that prepaid insurance is properl stated# C# Ensure that insurance agents are not related parties# ,# Ensure that all assets are insured#

+&# I$ the ratio o$ insurance expense to related propert , plant, and e!uip"ent is higher than expected, )hich o$ the $ollo)ing is a plausible explanation; A# %oo "uch expired insurance is still included in prepaid insurance# 7# PPCE insurance expense includes so"e expenses related to product liabilit insurance# C# ,epreciation expense )as based on overl short use$ul lives# ,# *o"e routine "aintenance on e!uip"ent )as added to the e!uip"ent asset account#

+'# :hich o$ the $ollo)ing is the "ost i"portant control activit over ac!uisitions o$ propert , plant, and e!uip"ent; A# Establishing a )ritten co"pan polic distinguishing bet)een capital and revenue expenditures# 7# Dsing a budget to $orecast and control ac!uisitions and retire"ents# C# Anal 3ing "onthl variances bet)een authori3ed expenditures and actual costs# ,# 1e!uiring ac!uisitions to be "ade b user depart"ents#

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Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

+4# In an intervie) )ith the plant "anager regarding operations, the auditor is "ost li(el to obtain evidence that raises concerns regarding A# %he capitali3ation vs# expensing polic # 7# %he allocation o$ $ixed and variable costs# C# %he need to )rite-o$$ e!uip"ent that has beco"e obsolete# ,# %he ade!uac o$ depreciation expense#

++# ,ue to a )ea(ness observed in internal control over recording retire"ents o$ e!uip"ent, the auditor "a decide to A# Inspect certain ite"s o$ e!uip"ent in the plant and trace those ite"s to the accounting records# 7# 1evie) the subsidiar ledger to ascertain )hether depreciation )as ta(en on each ite" o$ e!uip"ent during the ear# C# %race additions to the Eother assetsE account to search $or e!uip"ent that is still on hand but no longer is being used# ,# *elect certain ite"s o$ e!uip"ent $ro" the accounting records and locate the" in the plant#

+-# %he controller o$ Excello 8anu$acturing, Inc#, )ants to use ratio anal sis to identi$ the possible existence o$ idle e!uip"ent or the possibilit that e!uip"ent has been disposed o$ )ithout having been )ritten o$$# :hich o$ the $ollo)ing ratios )ould best acco"plish this ob=ective; A# ,epreciation expense/boo( value o$ "anu$acturing e!uip"ent# 7# Accu"ulated depreciation/boo( value o$ "anu$acturing e!uip"ent# C# 1epairs and "aintenance cost/direct labor costs# ,# 5ross "anu$acturing e!uip"ent cost/units produced#

+.# I$ the ratio o$ repairs and "aintenance expense to propert , plant, and e!uip"ent is higher than expected, )hich o$ the $ollo)ing is a plausible explanation; A# 1outine "aintenance on an i"portant piece o$ "achiner )as charged to repairs and "aintenance expense# 7# An addition to a building )as charged to repairs and "aintenance expense# C# %he co"pan $orgot to depreciate all o$ its e!uip"ent# ,# %he co"pan purchased an unusual a"ount o$ ne) e!uip"ent#

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Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

+/# :hich o$ the $ollo)ing best describes the independent auditor>s approach to obtaining satis$action concerning depreciation expense in the inco"e state"ent; A# <eri$ ing the "athe"atical accurac o$ the a"ounts charged to inco"e as a result o$ depreciation expense# 7# ,eter"ining the "ethod $or co"puting depreciation expense and ascertaining that it is in accordance )ith generall accepted accounting principles# C# 1econciling the a"ount o$ depreciation expense to those a"ounts credited to accu"ulated depreciation accounts# ,# Establishing the reasonableness o$ use$ul lives and depreciation "ethods $or depreciable assets and reco"puting the depreciation expense#

+0# In per$or"ing a search $or unrecorded retire"ents o$ $ixed assets, an auditor "ost li(el )ould A# Inspect the propert ledger and the insurance and tax records and then tour the client>s $acilities# 7# %our the client>s $acilities and then inspect the propert records and the insurance and tax records# C# Anal 3e the repair and "aintenance account and then tour the client>s $acilities# ,# %our the client>s $acilities and then anal 3e the repair and "aintenance account#

-2# ,eter"ining that proper a"ounts o$ depreciation are expensed provides assurance about "anage"ent>s assertions o$ presentation and disclosure and A# <aluation and allocation# 7# Co"pleteness# C# 1ights and obligations# ,# Existence#

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Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent
%hort Ans&er #uestions

-1# ,escribe the t pes o$ in$or"ation that should be included in the schedule o$ prepaid insurance that is used b the auditor as the basis $or auditing prepaid insurance#

-&# Auditors can usuall gather su$$icient, co"petent evidence on prepaid insurance b per$or"ing substantive anal tical procedures# :h is this;

-'# 6ist t)o )a s an auditor can test the existence and co"pleteness o$ insurance policies#

-4# Propert , plant, and e!uip"ent is o$ten a signi$icant portion o$ a co"pan >s assets# ,escribe the inherent ris( $actors that can a$$ect the audit o$ this account#

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Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

-+# For each o$ the $ollo)ing tests, state )hether it is a test o$ details o$ account balances or a test o$ details o$ transactions# %hen note $or )hich propert "anage"ent assertion the test provides evidence# %est depreciation calculations $or a sa"ple o$ capital assets For assets )ritten o$$, test a"ounts charged against inco"e and accu"ulated depreciation Ph sicall exa"ine the capital asset additions <ouch transactions included in repairs and "aintenance $or ite"s that should be capitali3ed <ouch signi$icant additions and dispositions to vendor invoices or other supporting docu"entation Exa"ine o$ con$ir" deeds or title docu"ents $or proo$ o$ o)nership

--# :hat tests do auditors t picall per$or" on a lead schedule $or propert , plant, and e!uip"ent and )hat assertion are the testing;

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Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

-.# For each anal tical procedure listed belo), identi$ a potential "isstate"ent in the propert "anage"ent accounts it could help $ind# a# Co"pute the ratio o$ depreciation expense to the related propert , plant, and e!uip"ent accounts and co"pare to prior ears> ratios b# Co"pare "onthl or annual repairs and "aintenance )ith previous ears c# Co"pute ratio o$ insurance expense to the related propert , plant, and e!uip"ent accounts and co"pare to prior ears> ratios

-/# %here are a nu"ber o$ i"portant disclosure ite"s to consider )hen auditing the propert "anage"ent process# 6ist t)o# :here in the $inancial state"ents can so"e o$ the disclosures relating to propert , plant, and e!uip"ent be $ound;

-0# 4o) do accounting standards regarding accounting $or the i"pair"ent or disposal o$ long-lived assets a$$ect the audit o$ propert , plant, and e!uip"ent;

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Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

.2# Identi$ the t pes o$ transactions that occur in the propert "anage"ent process#

$atching #uestions

.1# 8atch each o$ the $ollo)ing intangible assets )ith its proper general categor 1# Patented I% progra" &# ?rder bac(logs '# Franchise 4# Cop right +# %rade"ar( 8ar(eting Custo"er Artistic Contract %echnolog FFFF FFFF FFFF FFFF FFFF

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Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

Chapter 14 Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent Ans)er Ge

"rue / False #uestions

1# Prepaid expenses provide econo"ic bene$it $or longer than a ear# FA'%E

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Risk Analysis Blooms: Remember Difficulty: !asy "earning #b$ecti%e: &'( )no* the %arious ty+es of +re+ai, e-+enses. ,eferre, charges. an, intangible assets/ To+ic: Au,iting Pre+ai, !-+enses

&# An exa"ple o$ a prepaid account is prepaid interest# "()E

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Risk Analysis Blooms: Remember Difficulty: !asy "earning #b$ecti%e: &'( )no* the %arious ty+es of +re+ai, e-+enses. ,eferre, charges. an, intangible assets/ To+ic: Au,iting Pre+ai, !-+enses

'# Inherent ris( $or prepaid expenses )ould generall be assessed as lo) because these accounts do not usuall include co"plex transactions# "()E

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Risk Analysis Blooms: 0n,erstan, Difficulty: !asy "earning #b$ecti%e: &'(1 0n,erstan, the au,itor2s a++roach to au,iting +re+ai, insurance an, intangible assets/ To+ic: Substanti%e Proce,ures ' Pre+ai, Insurance

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Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

4# *ubstantive anal tical procedures are co""onl used to test prepaid accounts# "()E

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Risk Analysis Blooms: A++ly Difficulty: !asy "earning #b$ecti%e: &'(3 De%elo+ an un,erstan,ing of the +ro+erty management +rocess/ To+ic: Au,iting the Pro+erty 4anagement Process

+# ,isposition o$ capital assets through sale, exchange, retire"ent, or abandon"ent are transactions that occur in the propert "anage"ent process# "()E

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Risk Analysis Blooms: Remember Difficulty: !asy "earning #b$ecti%e: &'(& )no* the ty+es of transactions in the +ro+erty management +rocess/ To+ic: Ty+es of Transaction ' Pro+erty 4anagement Process

-# I$ the auditor has detected "isstate"ents in prior audits, the assess"ent o$ inherent ris( $or the propert "anage"ent process )ill usuall be set higher# "()E

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Risk Analysis Blooms: A++ly Difficulty: !asy "earning #b$ecti%e: &'(5 Assess control risk for +ro+erty. +lant. an, e6ui+ment/ To+ic: Control Risk Assessment ' Pro+erty 4anagement Process

14-&2

Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

.# %he propert , plant, and e!uip"ent records $unction should be segregated $ro" the custodial $unction# "()E

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Risk Analysis Blooms: Remember Difficulty: !asy "earning #b$ecti%e: &'(7 )no* the a++ro+riate segregation of ,uties for +ro+erty. +lant. an, e6ui+ment/ To+ic: Segregation of Duties ' Pro+erty 4anagement Process

/# *ubstantive anal tical procedures should not be used in the audit o$ propert , plant, and e!uip"ent# FA'%E

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Risk Analysis Blooms: A++ly Difficulty: !asy "earning #b$ecti%e: &'(8 )no* the substanti%e analytical +roce,ures use, to au,it +ro+erty. +lant. an, e6ui+ment/ To+ic: Substanti%e Analytical Proce,ures ' Pro+erty9 Plant9 an, !6ui+ment

0# 1evie)ing capital budgets and co"paring the a"ounts spent )ith a"ounts budgeted is an exa"ple o$ a substantive anal tical procedure $or auditing prepaid accounts# FA'%E

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Risk Analysis Blooms: A++ly Difficulty: !asy "earning #b$ecti%e: &'(8 )no* the substanti%e analytical +roce,ures use, to au,it +ro+erty. +lant. an, e6ui+ment/ To+ic: Substanti%e Analytical Proce,ures ' Pro+erty9 Plant9 an, !6ui+ment

14-&1

Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

12# In!uir o$ client personnel and a revie) o$ lease transactions $or the sa"e period can provide evidence on proper cuto$$ $or capital leases# "()E

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Risk Analysis Blooms: A++ly Difficulty: !asy "earning #b$ecti%e: &'(: )no* the tests of ,etails of account balances an, ,isclosures use, to au,it +ro+erty. +lant. an, e6ui+ment/ To+ic: Tests of Details of Transactions an, Account Balances an, Disclosures ' Pro+erty9 Plant9 an, !6ui+ment

11# %he purchase o$ capital assets should be consistent )ith the authori3ation table used b the client to approve such transactions# 4o)ever, no such table is nor"all used $or lease transactions# FA'%E

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision 4aking Blooms: Remember Difficulty: 1 4e,ium "earning #b$ecti%e: &'(5 Assess control risk for +ro+erty. +lant. an, e6ui+ment/ To+ic: Control Risk Assessment ' Pro+erty 4anagement Process

1&# I$ a periodic ph sical inventor o$ propert , plant, and e!uip"ent is ta(en, the individual responsible $or the inventor should be independent o$ the custodial and record-(eeping $unctions# "()E

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision 4aking Blooms: A++ly Difficulty: 1 4e,ium "earning #b$ecti%e: &'(7 )no* the a++ro+riate segregation of ,uties for +ro+erty. +lant. an, e6ui+ment/ To+ic: Segregation of Duties ' Pro+erty 4anagement Process

14-&&

Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

1'# I$ an entit has $e) capital asset purchases, it )ill generall not have a $or"al control s ste" over such transactions# "()E

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision 4aking Blooms: Remember Difficulty: 1 4e,ium "earning #b$ecti%e: &'(5 Assess control risk for +ro+erty. +lant. an, e6ui+ment/ To+ic: Control Risk Assessment ' Pro+erty 4anagement Process

14# 5enerall , auditors rel on controls )hen auditing the propert "anage"ent $unction and there$ore less substantive testing is used# FA'%E

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision 4aking Blooms: A++ly Difficulty: 1 4e,ium "earning #b$ecti%e: &'(5 Assess control risk for +ro+erty. +lant. an, e6ui+ment/ To+ic: Control Risk Assessment ' Pro+erty 4anagement Process

1+# Assets no longer used in operations are accounted $or in essentiall the sa"e "anner as those used in operations# FA'%E

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision 4aking Blooms: A++ly Difficulty: 1 4e,ium "earning #b$ecti%e: &'(: )no* the tests of ,etails of account balances an, ,isclosures use, to au,it +ro+erty. +lant. an, e6ui+ment/ To+ic: Tests of Details of Transactions an, Account Balances an, Disclosures ' Pro+erty9 Plant9 an, !6ui+ment

14-&'

Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent
$ultiple Choice #uestions

1-# An auditor t picall sets inherent ris( $or intangible assets at this level A# 6o)# 7# 8oderate# C# 9ero# *+ 4igh#

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Risk Analysis Blooms: 0n,erstan, Difficulty: !asy "earning #b$ecti%e: &'(1 0n,erstan, the au,itor2s a++roach to au,iting +re+ai, insurance an, intangible assets/ To+ic: Substanti%e Proce,ures ' Pre+ai, Insurance

1.# :hich o$ the $ollo)ing policies constitutes a control )ea(ness related to the ac!uisition o$ $actor e!uip"ent; A+ Ac!uisitions are to be "ade through and approved b the depart"ent in need o$ the e!uip"ent# 7# Advance executive approvals are re!uired $or e!uip"ent ac!uisitions# C# <ariances bet)een authori3ed e!uip"ent expenditures and actual costs are to be i""ediatel reported to "anage"ent# ,# ,epreciation policies are revie)ed onl once a ear#

AACSB: Communication AICPA BB: In,ustry AICPA FN: Risk Analysis Blooms: A++ly Difficulty: !asy "earning #b$ecti%e: &'(3 De%elo+ an un,erstan,ing of the +ro+erty management +rocess/ "earning #b$ecti%e: &'(5 Assess control risk for +ro+erty. +lant. an, e6ui+ment/ To+ic: Au,iting the Pro+erty 4anagement Process To+ic: Control Risk Assessment ' Pro+erty 4anagement Process

14-&4

Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

1/# :hich o$ the $ollo)ing !uestions )ould an auditor least li(el include on an internal control !uestionnaire concerning the initiation and execution o$ e!uip"ent transactions; A# Are re!uests $or "a=or repairs approved at a higher level than the depart"ent initiating the re!uest; 7# Are prenu"bered purchase orders used $or e!uip"ent and periodicall accounted $or; C# Are re!uests $or purchases o$ e!uip"ent revie)ed $or consideration o$ soliciting co"petitive bids; *+ Are procedures in place to "onitor and properl restrict access to e!uip"ent;

AACSB: Communication AICPA BB: In,ustry AICPA FN: Risk Analysis Blooms: A++ly Difficulty: !asy "earning #b$ecti%e: &'(3 De%elo+ an un,erstan,ing of the +ro+erty management +rocess/ "earning #b$ecti%e: &'(5 Assess control risk for +ro+erty. +lant. an, e6ui+ment/ To+ic: Au,iting the Pro+erty 4anagement Process To+ic: Control Risk Assessment ' Pro+erty 4anagement Process

10# %he auditor is "ost li(el to see( in$or"ation $ro" the plant "anager )ith respect to the A# Ade!uac o$ the provision $or uncollectible accounts# 7# Appropriateness o$ ph sical inventor observation procedures# C+ Existence o$ obsolete "achiner # ,# ,e$erral or procure"ent o$ certain necessar insurance coverage#

AACSB: Communication AICPA BB: In,ustry AICPA FN: 4easurement Blooms: A++ly Difficulty: !asy "earning #b$ecti%e: &'(3 De%elo+ an un,erstan,ing of the +ro+erty management +rocess/ "earning #b$ecti%e: &'(: )no* the tests of ,etails of account balances an, ,isclosures use, to au,it +ro+erty. +lant. an, e6ui+ment/ To+ic: Au,iting the Pro+erty 4anagement Process To+ic: Tests of Details of Transactions an, Account Balances an, Disclosures ' Pro+erty9 Plant9 an, !6ui+ment

14-&+

Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

&2# In the exa"ination o$ propert , plant, and e!uip"ent, the auditor tries to deter"ine all o$ the $ollo)ing except the A# Ade!uac o$ controls# 7# Extent o$ propert abandoned, retired, or sold during the ear# C+ Ade!uac o$ replace"ent $unds# ,# 1easonableness o$ the depreciation#

AACSB: Analytic AICPA BB: In,ustry AICPA FN: Risk Analysis Blooms: A++ly Difficulty: !asy "earning #b$ecti%e: &'(5 Assess control risk for +ro+erty. +lant. an, e6ui+ment/ "earning #b$ecti%e: &'(: )no* the tests of ,etails of account balances an, ,isclosures use, to au,it +ro+erty. +lant. an, e6ui+ment/ To+ic: Control Risk Assessment ' Pro+erty 4anagement Process To+ic: Tests of Details of Transactions an, Account Balances an, Disclosures ' Pro+erty9 Plant9 an, !6ui+ment

&1# %he auditor "a conclude that depreciation charges are insu$$icient b noting A# Insured values greatl in excess o$ boo( values# 7# 6arge a"ounts o$ $ull depreciated assets# C# Continuous trade-ins o$ relativel ne) assets# *+ Excessive recurring losses on assets retired#

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Risk Analysis Blooms: Analy;e Difficulty: !asy "earning #b$ecti%e: &'(: )no* the tests of ,etails of account balances an, ,isclosures use, to au,it +ro+erty. +lant. an, e6ui+ment/ To+ic: Tests of Details of Transactions an, Account Balances an, Disclosures ' Pro+erty9 Plant9 an, !6ui+ment

14-&-

Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

&&# %he auditor is least li(el to learn o$ retire"ent o$ e!uip"ent through )hich o$ the $ollo)ing; A+ 1evie)ing the purchase return and allo)ance account# 7# 1evie)ing depreciation# C# Anal 3ing debits to the accu"ulated depreciation account# ,# 1evie)ing insurance polic riders#

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision 4aking Blooms: Analy;e Difficulty: !asy "earning #b$ecti%e: &'(: )no* the tests of ,etails of account balances an, ,isclosures use, to au,it +ro+erty. +lant. an, e6ui+ment/ To+ic: Tests of Details of Transactions an, Account Balances an, Disclosures ' Pro+erty9 Plant9 an, !6ui+ment

&'# :hich o$ the $ollo)ing accounts )ould "ost li(el be revie)ed b the auditor to gain reasonable assurance that additions to propert , plant, and e!uip"ent are not understated; A# ,epreciation expense# 7# Accounts pa able# C# Cash# *+ 1epairs and "aintenance expense#

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision 4aking Blooms: A++ly Difficulty: !asy "earning #b$ecti%e: &'(: )no* the tests of ,etails of account balances an, ,isclosures use, to au,it +ro+erty. +lant. an, e6ui+ment/ To+ic: Tests of Details of Transactions an, Account Balances an, Disclosures ' Pro+erty9 Plant9 an, !6ui+ment

14-&.

Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

&4# :hich o$ the $ollo)ing accounts )ould "ost li(el be revie)ed b the auditor to gain reasonable assurance that additions to the e!uip"ent account are not understated; A+ 1epairs and "aintenance expense# 7# ,epreciation expense# C# 5ain on disposal o$ e!uip"ent# ,# Accounts pa able#

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision 4aking Blooms: A++ly Difficulty: !asy "earning #b$ecti%e: &'(: )no* the tests of ,etails of account balances an, ,isclosures use, to au,it +ro+erty. +lant. an, e6ui+ment/ To+ic: Tests of Details of Transactions an, Account Balances an, Disclosures ' Pro+erty9 Plant9 an, !6ui+ment

&+# In auditing intangible assets, an auditor "ost li(el )ould revie) or reco"pute a"orti3ation and deter"ine )hether the a"orti3ation period is reasonable in support o$ "anage"ent>s $inancial state"ent assertion o$ A+ <aluation and allocation# 7# Existence# C# Co"pleteness# ,# 1ights and obligations#

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: 4easurement Blooms: 0n,erstan, Difficulty: !asy "earning #b$ecti%e: &'(: )no* the tests of ,etails of account balances an, ,isclosures use, to au,it +ro+erty. +lant. an, e6ui+ment/ To+ic: Tests of Details of Transactions an, Account Balances an, Disclosures ' Pro+erty9 Plant9 an, !6ui+ment

14-&/

Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

&-# %esting depreciation calculations $or a sa"ple o$ propert , plant, and e!uip"ent tests the assertion o$ A# Existence# 7# Co"pleteness# C+ <aluation and allocation# ,# 1ights and obligations#

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: 4easurement Blooms: 0n,erstan, Difficulty: !asy "earning #b$ecti%e: &'(: )no* the tests of ,etails of account balances an, ,isclosures use, to au,it +ro+erty. +lant. an, e6ui+ment/ To+ic: Tests of Details of Transactions an, Account Balances an, Disclosures ' Pro+erty9 Plant9 an, !6ui+ment

&.# In testing plant and e!uip"ent balances, an auditor exa"ines ne) additions listed on an anal sis o$ plant and e!uip"ent# %his procedure "ost li(el obtains evidence concerning "anage"ent>s assertion o$ A# Co"pleteness# ,+ ?ccurrence# C# Classi$ication# ,# Accurac #

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: 4easurement Blooms: 0n,erstan, Difficulty: !asy "earning #b$ecti%e: &'(: )no* the tests of ,etails of account balances an, ,isclosures use, to au,it +ro+erty. +lant. an, e6ui+ment/ "earning #b$ecti%e: &' ( 0n,erstan, ho* to e%aluate au,it fin,ings an, reach a final conclusion on +ro+erty. +lant. an, e6ui+ment/ To+ic: !%aluating the Au,it Fin,ings ' Pro+erty9 Plant9 an, !6ui+ment To+ic: Tests of Details of Transactions an, Account Balances an, Disclosures ' Pro+erty9 Plant9 an, !6ui+ment

14-&0

Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

&/# %he cuto$$ assertion $or prepaid insurance A# Is never tested because a"ounts al)a s are i""aterial# 7# Is best tested as part o$ the testing o$ propert and e!uip"ent purchasing# C# Is best tested exclusivel b sending con$ir"ations to vendors# *+ Is best tested b reco"puting the unexpired portion o$ insurance policies in e$$ect#

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: 4easurement Blooms: A++ly Difficulty: 1 4e,ium "earning #b$ecti%e: &'( )no* the %arious ty+es of +re+ai, e-+enses. ,eferre, charges. an, intangible assets/ "earning #b$ecti%e: &'(1 0n,erstan, the au,itor2s a++roach to au,iting +re+ai, insurance an, intangible assets/ To+ic: Au,iting Pre+ai, !-+enses To+ic: Substanti%e Proce,ures ' Pre+ai, Insurance

&0# 1eco"puting the unexpired portion o$ insurance policies in e$$ect tests )hich o$ the $ollo)ing assertions are $or prepaid insurance; A# Existence# 7# Classi$ication# C# 1ights and obligations# *+ <aluation#

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: 4easurement Blooms: 0n,erstan, Difficulty: 1 4e,ium "earning #b$ecti%e: &'( )no* the %arious ty+es of +re+ai, e-+enses. ,eferre, charges. an, intangible assets/ "earning #b$ecti%e: &'(1 0n,erstan, the au,itor2s a++roach to au,iting +re+ai, insurance an, intangible assets/ To+ic: Au,iting Pre+ai, !-+enses To+ic: Substanti%e Proce,ures ' Pre+ai, Insurance

14-'2

Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

'2# In veri$ ing the a"ount o$ good)ill recorded b a client, the "ost convincing evidence that an auditor can obtain is b co"paring the recorded value o$ assets ac!uired )ith the A# Assessed value as evidenced b tax bills# 7# *eller>s boo( value as evidenced b $inancial state"ents# C# Insured value as evidenced b insurance policies# *+ Appraised value as evidenced b independent appraisals#

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: 4easurement Blooms: A++ly Difficulty: 1 4e,ium "earning #b$ecti%e: &'(3 De%elo+ an un,erstan,ing of the +ro+erty management +rocess/ "earning #b$ecti%e: &'(& )no* the ty+es of transactions in the +ro+erty management +rocess/ "earning #b$ecti%e: &'(: )no* the tests of ,etails of account balances an, ,isclosures use, to au,it +ro+erty. +lant. an, e6ui+ment/ To+ic: Au,iting the Pro+erty 4anagement Process To+ic: Tests of Details of Transactions an, Account Balances an, Disclosures ' Pro+erty9 Plant9 an, !6ui+ment To+ic: Ty+es of Transaction ' Pro+erty 4anagement Process

'1# %o achieve e$$ective control over $ixed asset additions, a co"pan should establish activities that re!uire A# Capitali3ation o$ the cost o$ $ixed asset additions in excess o$ a speci$ic dollar a"ount# 7# Per$or"ance o$ recurring $ixed asset "aintenance )or( solel b "aintenance depart"ent e"plo ees# C# An $ixed asset additions that are not used in the business to be classi$ied as invest"ents# *+ Authori3ation and approval o$ "a=or $ixed asset additions#

AACSB: Communication AICPA BB: Critical Thinking AICPA FN: Risk Analysis Blooms: A++ly Difficulty: 1 4e,ium "earning #b$ecti%e: &'(3 De%elo+ an un,erstan,ing of the +ro+erty management +rocess/ "earning #b$ecti%e: &'(5 Assess control risk for +ro+erty. +lant. an, e6ui+ment/ To+ic: Au,iting the Pro+erty 4anagement Process To+ic: Control Risk Assessment ' Pro+erty 4anagement Process

14-'1

Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

'&# :hich o$ the $ollo)ing constitutes a control )ea(ness related to $actor e!uip"ent; A+ A polic re!uiring all purchases o$ $actor e!uip"ent to be "ade b the depart"ent in need o$ the e!uip"ent# 7# Chec(s issued in pa "ent o$ purchases o$ e!uip"ent are not signed b the controller# C# Factor e!uip"ent replace"ents are generall "ade )hen esti"ated use$ul lives, as indicated in depreciation schedules, have expired# ,# Proceeds $ro" sales o$ $ull depreciated e!uip"ent are credited to other inco"e#

AACSB: Communication AICPA BB: Critical Thinking AICPA FN: Risk Analysis Blooms: Analy;e Difficulty: 1 4e,ium "earning #b$ecti%e: &'(3 De%elo+ an un,erstan,ing of the +ro+erty management +rocess/ "earning #b$ecti%e: &'(5 Assess control risk for +ro+erty. +lant. an, e6ui+ment/ To+ic: Au,iting the Pro+erty 4anagement Process To+ic: Control Risk Assessment ' Pro+erty 4anagement Process

''# %o i"prove accountabilit $or $ixed asset retire"ents, "anage"ent "ost li(el )ould i"ple"ent a s ste" o$ internal control that includes A# Continuous anal sis o$ the repairs and "aintenance account# 7# Periodic in!uir o$ plant executives b internal auditors as to )hether an plant assets have been retired# C+ Continuous utili3ation o$ se!uentiall nu"bered retire"ent )or( orders# ,# Periodic inspection o$ insurance policies b the internal auditors#

AACSB: Communication AICPA BB: Critical Thinking AICPA FN: Risk Analysis Blooms: A++ly Difficulty: 1 4e,ium "earning #b$ecti%e: &'(3 De%elo+ an un,erstan,ing of the +ro+erty management +rocess/ "earning #b$ecti%e: &'(5 Assess control risk for +ro+erty. +lant. an, e6ui+ment/ To+ic: Au,iting the Pro+erty 4anagement Process To+ic: Control Risk Assessment ' Pro+erty 4anagement Process

14-'&

Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

'4# Co"plex accounting issues $or propert , plant, and e!uip"ent include all o$ the $ollo)ing except A# 6ease accounting# ,+ %esting good)ill $or i"pair"ent# C# Capitali3ed interest# ,# *el$-constructed assets#

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Risk Analysis Blooms: Remember Difficulty: 1 4e,ium "earning #b$ecti%e: &'(& )no* the ty+es of transactions in the +ro+erty management +rocess/ "earning #b$ecti%e: &'(< Be familiar *ith the inherent risks for +ro+erty. +lant. an, e6ui+ment/ To+ic: Inherent Risk Assessment ' Pro+erty 4anagement Process To+ic: Ty+es of Transaction ' Pro+erty 4anagement Process

'+# :hen there are nu"erous propert and e!uip"ent transactions during the ear, an auditor planning to set control ris( at the "ini"u" level usuall plans to obtain an understanding o$ internal control and to per$or" A# %ests o$ controls and extensive tests o$ propert and e!uip"ent balances at the end o$ the ear# 7# Extensive tests o$ current ear propert and e!uip"ent transactions# C+ %ests o$ controls and li"ited tests o$ current ear propert and e!uip"ent transactions# ,# Anal tical procedures $or propert and e!uip"ent balances at the end o$ the ear#

AACSB: Analytic AICPA BB: In,ustry AICPA FN: Risk Analysis Blooms: A++ly Difficulty: 1 4e,ium "earning #b$ecti%e: &'(5 Assess control risk for +ro+erty. +lant. an, e6ui+ment/ "earning #b$ecti%e: &'(8 )no* the substanti%e analytical +roce,ures use, to au,it +ro+erty. +lant. an, e6ui+ment/ "earning #b$ecti%e: &'(: )no* the tests of ,etails of account balances an, ,isclosures use, to au,it +ro+erty. +lant. an, e6ui+ment/ To+ic: Control Risk Assessment ' Pro+erty 4anagement Process To+ic: Substanti%e Analytical Proce,ures ' Pro+erty9 Plant9 an, !6ui+ment To+ic: Tests of Details of Transactions an, Account Balances an, Disclosures ' Pro+erty9 Plant9 an, !6ui+ment

14-''

Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

'-# E!uip"ent ac!uisitions that are "isclassi$ied as "aintenance expenses "ost li(el )ould be detected b a control activit that provides $or A# *egregation o$ duties o$ e"plo ees in the accounts pa able depart"ent# 7# Independent veri$ication o$ invoices $or disburse"ents recorded as e!uip"ent ac!uisitions# C+ Investigation o$ variances )ithin a $or"al budgeting s ste"# ,# Authori3ation b the board o$ directors o$ signi$icant e!uip"ent ac!uisitions#

AACSB: Communication AICPA BB: Critical Thinking AICPA FN: Risk Analysis Blooms: Analy;e Difficulty: 1 4e,ium "earning #b$ecti%e: &'(5 Assess control risk for +ro+erty. +lant. an, e6ui+ment/ "earning #b$ecti%e: &'(: )no* the tests of ,etails of account balances an, ,isclosures use, to au,it +ro+erty. +lant. an, e6ui+ment/ To+ic: Control Risk Assessment ' Pro+erty 4anagement Process To+ic: Tests of Details of Transactions an, Account Balances an, Disclosures ' Pro+erty9 Plant9 an, !6ui+ment

'.# :hich o$ the $ollo)ing situations has the best chance o$ being detected )hen a CPA co"pares revenues and expenses reported $or the ear being audited @current earA )ith the prior ear and investigates all changes exceeding a $ixed percentage; A# An increase in propert tax rates has not been recogni3ed in the co"pan >s current ear accrual# 7# %he cashier began lapping accounts receivable in the current ear# C# 7ecause o$ )orsening econo"ic conditions, the current ear provision $or uncollectible accounts )as inade!uate# *+ %he co"pan changed its capitali3ation polic $or s"all tools in the current ear#

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision 4aking Blooms: Analy;e Difficulty: 1 4e,ium "earning #b$ecti%e: &'(8 )no* the substanti%e analytical +roce,ures use, to au,it +ro+erty. +lant. an, e6ui+ment/ "earning #b$ecti%e: &'(: )no* the tests of ,etails of account balances an, ,isclosures use, to au,it +ro+erty. +lant. an, e6ui+ment/ To+ic: Substanti%e Analytical Proce,ures ' Pro+erty9 Plant9 an, !6ui+ment To+ic: Tests of Details of Transactions an, Account Balances an, Disclosures ' Pro+erty9 Plant9 an, !6ui+ment

14-'4

Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

'/# %ennessee Co"pan violated co"pan polic b erroneousl capitali3ing the cost o$ painting its )arehouse# %he CPA exa"ining %ennessee>s $inancial state"ents )ould "ost li(el learn o$ this error b A# ,iscussing %ennessee>s capitali3ation policies )ith its controller# ,+ 1evie)ing the titles and descriptions $or all construction )or( orders issued during the ear# C# ?bserving during the ph sical inventor observation that the )arehouse has been painted# ,# Exa"ining in detail a sa"ple o$ construction )or( orders#

AACSB: Analytic AICPA BB: In,ustry AICPA FN: Decision 4aking Blooms: A++ly Difficulty: 1 4e,ium "earning #b$ecti%e: &'(: )no* the tests of ,etails of account balances an, ,isclosures use, to au,it +ro+erty. +lant. an, e6ui+ment/ To+ic: Tests of Details of Transactions an, Account Balances an, Disclosures ' Pro+erty9 Plant9 an, !6ui+ment

'0# :hich o$ the $ollo)ing is li(el the "ost e$$ective audit procedure $or the veri$ication o$ the legal o)nership o$ real propert ; A# Exa"ination o$ correspondence )ith the corporate counsel concerning ac!uisitions# 7# Exa"ination o$ o)nership docu"ents registered and on $ile at a public hall o$ records# C# Exa"ination o$ corporate "inutes and resolutions concerning the approval to ac!uire propert , plant, and e!uip"ent# *+ Exa"ination o$ deeds and title guarant policies on hand#

AACSB: Communication AICPA BB: Critical Thinking AICPA FN: 4easurement Blooms: A++ly Difficulty: 1 4e,ium "earning #b$ecti%e: &'(: )no* the tests of ,etails of account balances an, ,isclosures use, to au,it +ro+erty. +lant. an, e6ui+ment/ To+ic: Tests of Details of Transactions an, Account Balances an, Disclosures ' Pro+erty9 Plant9 an, !6ui+ment

14-'+

Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

42# A nor"al audit procedure is to anal 3e the current ear>s repairs and "aintenance accounts to provide evidence in support o$ the audit proposition that A# Expenditures $or $ixed assets have been recorded in the proper period# 7# Capital expenditures have been properl authori3ed# C# Boncapitali3able expenditures have been properl expensed# *+ Expenditures $or $ixed assets have been capitali3ed#

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision 4aking Blooms: A++ly Difficulty: 1 4e,ium "earning #b$ecti%e: &'(: )no* the tests of ,etails of account balances an, ,isclosures use, to au,it +ro+erty. +lant. an, e6ui+ment/ To+ic: Tests of Details of Transactions an, Account Balances an, Disclosures ' Pro+erty9 Plant9 an, !6ui+ment

41# :hich o$ the $ollo)ing is the best evidence o$ real estate o)nership at the balance sheet date; A# %itle insurance polic # 7# A duplicate o$ the original deed held in the client>s sa$e# C+ Paid real estate tax bills# ,# Closing state"ents#

AACSB: Communication AICPA BB: In,ustry AICPA FN: 4easurement Blooms: Analy;e Difficulty: 1 4e,ium "earning #b$ecti%e: &'(: )no* the tests of ,etails of account balances an, ,isclosures use, to au,it +ro+erty. +lant. an, e6ui+ment/ To+ic: Tests of Details of Transactions an, Account Balances an, Disclosures ' Pro+erty9 Plant9 an, !6ui+ment

14-'-

Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

4&# :hich o$ the $ollo)ing audit procedures )ould be least li(el to lead the auditor to $ind unrecorded $ixed asset disposals; A# Exa"ination o$ insurance policies $or evidence o$ a dropped or cancelled polic # ,+ 1evie) o$ repairs and "aintenance expense# C# 1evie) o$ propert tax $iles# ,# *canning o$ invoices $or $ixed asset additions $or evidence o$ a purchase to replace a previousl o)ned $ixed asset#

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision 4aking Blooms: Analy;e Difficulty: 1 4e,ium "earning #b$ecti%e: &'(: )no* the tests of ,etails of account balances an, ,isclosures use, to au,it +ro+erty. +lant. an, e6ui+ment/ To+ic: Tests of Details of Transactions an, Account Balances an, Disclosures ' Pro+erty9 Plant9 an, !6ui+ment

4'# In testing $or unrecorded retire"ents o$ e!uip"ent, an auditor "ost li(el )ould A+ *elect ite"s o$ e!uip"ent $ro" the accounting records and then locate the" during the plant tour# 7# Co"pare depreciation =ournal entries )ith si"ilar prior- ear entries in search o$ $ull depreciated e!uip"ent# C# Inspect ite"s o$ e!uip"ent observed during the plant tour and then trace the" to the e!uip"ent subsidiar ledger# ,# *can the general =ournal $or unusual e!uip"ent additions and excessive debits to repairs and "aintenance expense#

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision 4aking Blooms: A++ly Difficulty: 1 4e,ium "earning #b$ecti%e: &'(: )no* the tests of ,etails of account balances an, ,isclosures use, to au,it +ro+erty. +lant. an, e6ui+ment/ To+ic: Tests of Details of Transactions an, Account Balances an, Disclosures ' Pro+erty9 Plant9 an, !6ui+ment

14-'.

Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

44# An auditor anal 3es repairs and "aintenance accounts pri"aril to obtain evidence in support o$ the audit assertion that all A# Boncapitali3able expenditures $or repairs and "aintenance have been recorded in the proper period# 7# Expenditures $or propert and e!uip"ent have been recorded in the proper period# C# Boncapitali3able expenditures $or repairs and "aintenance have been properl charged to expense# *+ Expenditures $or propert and e!uip"ent have not been charged to expenses#

AACSB: Communication AICPA BB: Critical Thinking AICPA FN: 4easurement Blooms: A++ly Difficulty: 1 4e,ium "earning #b$ecti%e: &'(: )no* the tests of ,etails of account balances an, ,isclosures use, to au,it +ro+erty. +lant. an, e6ui+ment/ To+ic: Tests of Details of Transactions an, Account Balances an, Disclosures ' Pro+erty9 Plant9 an, !6ui+ment

4+# :hich o$ the $ollo)ing explanations "ight satis$ an auditor )ho discovers signi$icant debits to an accu"ulated depreciation account; A+ *everal $ull depreciated assets )ere retired during the ear# 7# Prior ears> depreciation charges )ere erroneousl understated# C# A reserve $or possible loss on retire"ent has been recorded# ,# An asset has been recorded at its $air value#

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision 4aking Blooms: Analy;e Difficulty: 1 4e,ium "earning #b$ecti%e: &'(: )no* the tests of ,etails of account balances an, ,isclosures use, to au,it +ro+erty. +lant. an, e6ui+ment/ "earning #b$ecti%e: &' ( 0n,erstan, ho* to e%aluate au,it fin,ings an, reach a final conclusion on +ro+erty. +lant. an, e6ui+ment/ To+ic: !%aluating the Au,it Fin,ings ' Pro+erty9 Plant9 an, !6ui+ment To+ic: Tests of Details of Transactions an, Account Balances an, Disclosures ' Pro+erty9 Plant9 an, !6ui+ment

14-'/

Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

4-# In testing plant and e!uip"ent balances, an auditor "a inspect ne) additions listed on the anal sis o$ plant and e!uip"ent# %his procedure is designed to obtain evidence concerning "anage"ent>s assertion@sA about A# Presentation and disclosure# ,+ Existence or occurrence# C# 7oth @1A presentation and disclosure and @&A existence and occurrence# ,# Beither @1A presentation and disclosure nor @&A existence and occurrence#

AACSB: Analytic AICPA BB: In,ustry AICPA FN: 4easurement Blooms: 0n,erstan, Difficulty: 1 4e,ium "earning #b$ecti%e: &'(: )no* the tests of ,etails of account balances an, ,isclosures use, to au,it +ro+erty. +lant. an, e6ui+ment/ "earning #b$ecti%e: &' ( 0n,erstan, ho* to e%aluate au,it fin,ings an, reach a final conclusion on +ro+erty. +lant. an, e6ui+ment/ To+ic: !%aluating the Au,it Fin,ings ' Pro+erty9 Plant9 an, !6ui+ment To+ic: Tests of Details of Transactions an, Account Balances an, Disclosures ' Pro+erty9 Plant9 an, !6ui+ment

4.# :hich o$ the $ollo)ing explanations "ost li(el )ould satis$ an auditor )ho !uestions "anage"ent about signi$icant debits to the accu"ulated depreciation accounts; A# %he esti"ated re"aining use$ul lives o$ plant assets )ere revised up)ard# ,+ Plant assets )ere retired during the ear# C# %he prior ear>s depreciation expense )as erroneousl understated# ,# ?verhead allocations )ere revised at ear-end#

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision 4aking Blooms: Analy;e Difficulty: 1 4e,ium "earning #b$ecti%e: &'(: )no* the tests of ,etails of account balances an, ,isclosures use, to au,it +ro+erty. +lant. an, e6ui+ment/ "earning #b$ecti%e: &' ( 0n,erstan, ho* to e%aluate au,it fin,ings an, reach a final conclusion on +ro+erty. +lant. an, e6ui+ment/ To+ic: !%aluating the Au,it Fin,ings ' Pro+erty9 Plant9 an, !6ui+ment To+ic: Tests of Details of Transactions an, Account Balances an, Disclosures ' Pro+erty9 Plant9 an, !6ui+ment

14-'0

Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

4/# 7 selecting a sa"ple o$ additions to propert , plant, and e!uip"ent and then exa"ining the related vendor invoices, the auditor is testing )hich o$ the $ollo)ing assertions $or propert , plant, and e!uip"ent; A+ ?ccurrence# 7# Co"pleteness# C# Cuto$$# ,# Classi$ication#

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: 4easurement Blooms: 0n,erstan, Difficulty: 1 4e,ium "earning #b$ecti%e: &'(: )no* the tests of ,etails of account balances an, ,isclosures use, to au,it +ro+erty. +lant. an, e6ui+ment/ "earning #b$ecti%e: &' ( 0n,erstan, ho* to e%aluate au,it fin,ings an, reach a final conclusion on +ro+erty. +lant. an, e6ui+ment/ To+ic: !%aluating the Au,it Fin,ings ' Pro+erty9 Plant9 an, !6ui+ment To+ic: Tests of Details of Transactions an, Account Balances an, Disclosures ' Pro+erty9 Plant9 an, !6ui+ment

40# %esting a sa"ple o$ repairs and "aintenance ite"s to ensure that the )ere properl classi$ied as repairs as opposed to propert , plant, and e!uip"ent tests )hich o$ the $ollo)ing assertions $or the propert , plant, and e!uip"ent account; A# ?ccurrence# ,+ Co"pleteness# C# Cuto$$# ,# Authori3ation#

AACSB: Communication AICPA BB: Critical Thinking AICPA FN: 4easurement Blooms: 0n,erstan, Difficulty: 1 4e,ium "earning #b$ecti%e: &'(: )no* the tests of ,etails of account balances an, ,isclosures use, to au,it +ro+erty. +lant. an, e6ui+ment/ "earning #b$ecti%e: &' ( 0n,erstan, ho* to e%aluate au,it fin,ings an, reach a final conclusion on +ro+erty. +lant. an, e6ui+ment/ To+ic: !%aluating the Au,it Fin,ings ' Pro+erty9 Plant9 an, !6ui+ment To+ic: Tests of Details of Transactions an, Account Balances an, Disclosures ' Pro+erty9 Plant9 an, !6ui+ment

14-42

Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

+2# %esting a sa"ple o$ repairs and "aintenance expense ite"s to ensure that the )ere properl classi$ied as repairs as opposed to propert , plant, and e!uip"ent tests )hich o$ the $ollo)ing assertions $or the repairs and "aintenance expense account; A+ ?ccurrence# 7# Co"pleteness# C# Cuto$$# ,# Authori3ation#

AACSB: Communication AICPA BB: Critical Thinking AICPA FN: 4easurement Blooms: 0n,erstan, Difficulty: 1 4e,ium "earning #b$ecti%e: &'(: )no* the tests of ,etails of account balances an, ,isclosures use, to au,it +ro+erty. +lant. an, e6ui+ment/ "earning #b$ecti%e: &' ( 0n,erstan, ho* to e%aluate au,it fin,ings an, reach a final conclusion on +ro+erty. +lant. an, e6ui+ment/ To+ic: !%aluating the Au,it Fin,ings ' Pro+erty9 Plant9 an, !6ui+ment To+ic: Tests of Details of Transactions an, Account Balances an, Disclosures ' Pro+erty9 Plant9 an, !6ui+ment

+1# Auditors )ill exa"ine the insurance register pri"aril to A# Ensure that dollar coverage a"ounts are ade!uate# ,+ Exa"ine polic expiration dates to veri$ that prepaid insurance is properl stated# C# Ensure that insurance agents are not related parties# ,# Ensure that all assets are insured#

AACSB: Communication AICPA BB: Critical Thinking AICPA FN: Decision 4aking Blooms: A++ly Difficulty: 3 =ar, "earning #b$ecti%e: &'( )no* the %arious ty+es of +re+ai, e-+enses. ,eferre, charges. an, intangible assets/ "earning #b$ecti%e: &'(1 0n,erstan, the au,itor2s a++roach to au,iting +re+ai, insurance an, intangible assets/ To+ic: Au,iting Pre+ai, !-+enses To+ic: Substanti%e Proce,ures ' Pre+ai, Insurance

14-41

Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

+&# I$ the ratio o$ insurance expense to related propert , plant, and e!uip"ent is higher than expected, )hich o$ the $ollo)ing is a plausible explanation; A# %oo "uch expired insurance is still included in prepaid insurance# ,+ PPCE insurance expense includes so"e expenses related to product liabilit insurance# C# ,epreciation expense )as based on overl short use$ul lives# ,# *o"e routine "aintenance on e!uip"ent )as added to the e!uip"ent asset account#

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision 4aking Blooms: Analy;e Difficulty: 3 =ar, "earning #b$ecti%e: &'( )no* the %arious ty+es of +re+ai, e-+enses. ,eferre, charges. an, intangible assets/ "earning #b$ecti%e: &'(1 0n,erstan, the au,itor2s a++roach to au,iting +re+ai, insurance an, intangible assets/ "earning #b$ecti%e: &'(8 )no* the substanti%e analytical +roce,ures use, to au,it +ro+erty. +lant. an, e6ui+ment/ "earning #b$ecti%e: &'(: )no* the tests of ,etails of account balances an, ,isclosures use, to au,it +ro+erty. +lant. an, e6ui+ment/ To+ic: Au,iting Pre+ai, !-+enses To+ic: Substanti%e Analytical Proce,ures ' Pro+erty9 Plant9 an, !6ui+ment To+ic: Substanti%e Proce,ures ' Pre+ai, Insurance To+ic: Tests of Details of Transactions an, Account Balances an, Disclosures ' Pro+erty9 Plant9 an, !6ui+ment

+'# :hich o$ the $ollo)ing is the "ost i"portant control activit over ac!uisitions o$ propert , plant, and e!uip"ent; A# Establishing a )ritten co"pan polic distinguishing bet)een capital and revenue expenditures# ,+ Dsing a budget to $orecast and control ac!uisitions and retire"ents# C# Anal 3ing "onthl variances bet)een authori3ed expenditures and actual costs# ,# 1e!uiring ac!uisitions to be "ade b user depart"ents#

AACSB: Communication AICPA BB: Critical Thinking AICPA FN: Risk Analysis Blooms: 0n,erstan, Difficulty: 3 =ar, "earning #b$ecti%e: &'(3 De%elo+ an un,erstan,ing of the +ro+erty management +rocess/ "earning #b$ecti%e: &'(5 Assess control risk for +ro+erty. +lant. an, e6ui+ment/ To+ic: Au,iting the Pro+erty 4anagement Process To+ic: Control Risk Assessment ' Pro+erty 4anagement Process

14-4&

Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

+4# In an intervie) )ith the plant "anager regarding operations, the auditor is "ost li(el to obtain evidence that raises concerns regarding A# %he capitali3ation vs# expensing polic # 7# %he allocation o$ $ixed and variable costs# C+ %he need to )rite-o$$ e!uip"ent that has beco"e obsolete# ,# %he ade!uac o$ depreciation expense#

AACSB: Communication AICPA BB: In,ustry AICPA FN: 4easurement Blooms: A++ly Difficulty: 3 =ar, "earning #b$ecti%e: &'(3 De%elo+ an un,erstan,ing of the +ro+erty management +rocess/ "earning #b$ecti%e: &'(: )no* the tests of ,etails of account balances an, ,isclosures use, to au,it +ro+erty. +lant. an, e6ui+ment/ To+ic: Au,iting the Pro+erty 4anagement Process To+ic: Tests of Details of Transactions an, Account Balances an, Disclosures ' Pro+erty9 Plant9 an, !6ui+ment

++# ,ue to a )ea(ness observed in internal control over recording retire"ents o$ e!uip"ent, the auditor "a decide to A# Inspect certain ite"s o$ e!uip"ent in the plant and trace those ite"s to the accounting records# 7# 1evie) the subsidiar ledger to ascertain )hether depreciation )as ta(en on each ite" o$ e!uip"ent during the ear# C# %race additions to the Eother assetsE account to search $or e!uip"ent that is still on hand but no longer is being used# *+ *elect certain ite"s o$ e!uip"ent $ro" the accounting records and locate the" in the plant#

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Risk Analysis Blooms: A++ly Difficulty: 3 =ar, "earning #b$ecti%e: &'(5 Assess control risk for +ro+erty. +lant. an, e6ui+ment/ "earning #b$ecti%e: &'(: )no* the tests of ,etails of account balances an, ,isclosures use, to au,it +ro+erty. +lant. an, e6ui+ment/ To+ic: Control Risk Assessment ' Pro+erty 4anagement Process To+ic: Tests of Details of Transactions an, Account Balances an, Disclosures ' Pro+erty9 Plant9 an, !6ui+ment

14-4'

Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

+-# %he controller o$ Excello 8anu$acturing, Inc#, )ants to use ratio anal sis to identi$ the possible existence o$ idle e!uip"ent or the possibilit that e!uip"ent has been disposed o$ )ithout having been )ritten o$$# :hich o$ the $ollo)ing ratios )ould best acco"plish this ob=ective; A# ,epreciation expense/boo( value o$ "anu$acturing e!uip"ent# 7# Accu"ulated depreciation/boo( value o$ "anu$acturing e!uip"ent# C# 1epairs and "aintenance cost/direct labor costs# *+ 5ross "anu$acturing e!uip"ent cost/units produced#

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision 4aking Blooms: Analy;e Difficulty: 3 =ar, "earning #b$ecti%e: &'(8 )no* the substanti%e analytical +roce,ures use, to au,it +ro+erty. +lant. an, e6ui+ment/ "earning #b$ecti%e: &'(: )no* the tests of ,etails of account balances an, ,isclosures use, to au,it +ro+erty. +lant. an, e6ui+ment/ To+ic: Substanti%e Analytical Proce,ures ' Pro+erty9 Plant9 an, !6ui+ment To+ic: Tests of Details of Transactions an, Account Balances an, Disclosures ' Pro+erty9 Plant9 an, !6ui+ment

+.# I$ the ratio o$ repairs and "aintenance expense to propert , plant, and e!uip"ent is higher than expected, )hich o$ the $ollo)ing is a plausible explanation; A# 1outine "aintenance on an i"portant piece o$ "achiner )as charged to repairs and "aintenance expense# ,+ An addition to a building )as charged to repairs and "aintenance expense# C# %he co"pan $orgot to depreciate all o$ its e!uip"ent# ,# %he co"pan purchased an unusual a"ount o$ ne) e!uip"ent#

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision 4aking Blooms: Analy;e Difficulty: 3 =ar, "earning #b$ecti%e: &'(8 )no* the substanti%e analytical +roce,ures use, to au,it +ro+erty. +lant. an, e6ui+ment/ "earning #b$ecti%e: &'(: )no* the tests of ,etails of account balances an, ,isclosures use, to au,it +ro+erty. +lant. an, e6ui+ment/ To+ic: Substanti%e Analytical Proce,ures ' Pro+erty9 Plant9 an, !6ui+ment To+ic: Tests of Details of Transactions an, Account Balances an, Disclosures ' Pro+erty9 Plant9 an, !6ui+ment

14-44

Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

+/# :hich o$ the $ollo)ing best describes the independent auditor>s approach to obtaining satis$action concerning depreciation expense in the inco"e state"ent; A# <eri$ ing the "athe"atical accurac o$ the a"ounts charged to inco"e as a result o$ depreciation expense# 7# ,eter"ining the "ethod $or co"puting depreciation expense and ascertaining that it is in accordance )ith generall accepted accounting principles# C# 1econciling the a"ount o$ depreciation expense to those a"ounts credited to accu"ulated depreciation accounts# *+ Establishing the reasonableness o$ use$ul lives and depreciation "ethods $or depreciable assets and reco"puting the depreciation expense#

AACSB: Communication AICPA BB: Critical Thinking AICPA FN: 4easurement Blooms: A++ly Difficulty: 3 =ar, "earning #b$ecti%e: &'(: )no* the tests of ,etails of account balances an, ,isclosures use, to au,it +ro+erty. +lant. an, e6ui+ment/ To+ic: Tests of Details of Transactions an, Account Balances an, Disclosures ' Pro+erty9 Plant9 an, !6ui+ment

+0# In per$or"ing a search $or unrecorded retire"ents o$ $ixed assets, an auditor "ost li(el )ould A+ Inspect the propert ledger and the insurance and tax records and then tour the client>s $acilities# 7# %our the client>s $acilities and then inspect the propert records and the insurance and tax records# C# Anal 3e the repair and "aintenance account and then tour the client>s $acilities# ,# %our the client>s $acilities and then anal 3e the repair and "aintenance account#

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision 4aking Blooms: A++ly Difficulty: 3 =ar, "earning #b$ecti%e: &'(: )no* the tests of ,etails of account balances an, ,isclosures use, to au,it +ro+erty. +lant. an, e6ui+ment/ To+ic: Tests of Details of Transactions an, Account Balances an, Disclosures ' Pro+erty9 Plant9 an, !6ui+ment

14-4+

Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

-2# ,eter"ining that proper a"ounts o$ depreciation are expensed provides assurance about "anage"ent>s assertions o$ presentation and disclosure and A+ <aluation and allocation# 7# Co"pleteness# C# 1ights and obligations# ,# Existence#

AACSB: Communication AICPA BB: Critical Thinking AICPA FN: 4easurement Blooms: 0n,erstan, Difficulty: 3 =ar, "earning #b$ecti%e: &'(: )no* the tests of ,etails of account balances an, ,isclosures use, to au,it +ro+erty. +lant. an, e6ui+ment/ "earning #b$ecti%e: &' ( 0n,erstan, ho* to e%aluate au,it fin,ings an, reach a final conclusion on +ro+erty. +lant. an, e6ui+ment/ To+ic: !%aluating the Au,it Fin,ings ' Pro+erty9 Plant9 an, !6ui+ment To+ic: Tests of Details of Transactions an, Account Balances an, Disclosures ' Pro+erty9 Plant9 an, !6ui+ment

%hort Ans&er #uestions

-1# ,escribe the t pes o$ in$or"ation that should be included in the schedule o$ prepaid insurance that is used b the auditor as the basis $or auditing prepaid insurance# %he schedule should include each insurance polic in $orce, the polic nu"ber, the insurance coverage $or each polic , the pre"iu" a"ount and period covered, the insurance expense $or the ear, and the a"ount o$ prepaid insurance at the end o$ the ear#

AACSB: Communication AICPA BB: Critical Thinking AICPA FN: 4easurement Blooms: A++ly Difficulty: !asy "earning #b$ecti%e: &'(1 0n,erstan, the au,itor2s a++roach to au,iting +re+ai, insurance an, intangible assets/ To+ic: Substanti%e Proce,ures ' Pre+ai, Insurance

14-4-

Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

-&# Auditors can usuall gather su$$icient, co"petent evidence on prepaid insurance b per$or"ing substantive anal tical procedures# :h is this; %he audit o$ prepaid insurance should ordinaril ta(e a relativel s"all a"ount o$ audit ti"e because the balance in prepaid insurance is nor"all i""aterial, there are ordinaril $e) transactions "ade during the ear, and these transactions are ordinaril not co"plex#

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: 4easurement Blooms: 0n,erstan, Difficulty: 1 4e,ium "earning #b$ecti%e: &'(1 0n,erstan, the au,itor2s a++roach to au,iting +re+ai, insurance an, intangible assets/ To+ic: Substanti%e Proce,ures ' Pre+ai, Insurance

-'# 6ist t)o )a s an auditor can test the existence and co"pleteness o$ insurance policies# 1# *end a con$ir"ation to the entit >s insurance bro(ers, re!uesting in$or"ation on each polic >s nu"ber, coverage, expiration date, and pre"iu"s# &# Exa"ine the underl ing docu"entation such as the insurance bills and policies#

AACSB: Communication AICPA BB: Critical Thinking AICPA FN: 4easurement Blooms: A++ly Difficulty: !asy "earning #b$ecti%e: &'(1 0n,erstan, the au,itor2s a++roach to au,iting +re+ai, insurance an, intangible assets/ To+ic: Substanti%e Proce,ures ' Pre+ai, Insurance

14-4.

Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

-4# Propert , plant, and e!uip"ent is o$ten a signi$icant portion o$ a co"pan >s assets# ,escribe the inherent ris( $actors that can a$$ect the audit o$ this account# ?ne inherent ris( $actor concerns the co"plexit o$ accounting $or certain t pes o$ propert , plant, and e!uip"ent# Issues such as lease accounting, sel$-constructed assets, and capitali3ed interest are o$ten accounted $or incorrectl # %hese errors can easil lead to "aterial "isstate"ents in the $inancial state"ents# Certain transactions involving propert , plant, and e!uip"ent are also di$$icult to audit# For exa"ple, trade-in values o$ assets exchanged and the cost accu"ulation o$ sel$-constructed assets are hard to veri$ # Finall , i$ "isstate"ents )ere detected in propert , plant, and e!uip"ent accounts in prior ears, the inherent ris( o$ the account )ill t picall be set higher than i$ no "isstate"ents had been $ound#

AACSB: Communication AICPA BB: Critical Thinking AICPA FN: Risk Analysis Blooms: Remember Difficulty: 1 4e,ium "earning #b$ecti%e: &'(< Be familiar *ith the inherent risks for +ro+erty. +lant. an, e6ui+ment/ To+ic: Inherent Risk Assessment ' Pro+erty 4anagement Process

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Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

-+# For each o$ the $ollo)ing tests, state )hether it is a test o$ details o$ account balances or a test o$ details o$ transactions# %hen note $or )hich propert "anage"ent assertion the test provides evidence# %est depreciation calculations $or a sa"ple o$ capital assets For assets )ritten o$$, test a"ounts charged against inco"e and accu"ulated depreciation Ph sicall exa"ine the capital asset additions <ouch transactions included in repairs and "aintenance $or ite"s that should be capitali3ed <ouch signi$icant additions and dispositions to vendor invoices or other supporting docu"entation Exa"ine o$ con$ir" deeds or title docu"ents $or proo$ o$ o)nership 1# Account balances - <aluation and allocation &# %ransactions - Accurac '# Account balances - Existence 4# %ransactions - Classi$ication +# %ransactions - ?ccurrence -# Account balances - 1ights and obligations

AACSB: Communication AICPA BB: Critical Thinking AICPA FN: Decision 4aking Blooms: 0n,erstan, Difficulty: 3 =ar, "earning #b$ecti%e: &'(: )no* the tests of ,etails of account balances an, ,isclosures use, to au,it +ro+erty. +lant. an, e6ui+ment/ To+ic: Tests of Details of Transactions an, Account Balances an, Disclosures ' Pro+erty9 Plant9 an, !6ui+ment

--# :hat tests do auditors t picall per$or" on a lead schedule $or propert , plant, and e!uip"ent and )hat assertion are the testing; Auditors t picall $oot the lead schedule and the individual accounts are agreed to the general ledger# %his provides evidence $or the accurac assertion#

AACSB: Communication AICPA BB: Critical Thinking AICPA FN: 4easurement Blooms: A++ly Difficulty: !asy "earning #b$ecti%e: &'(: )no* the tests of ,etails of account balances an, ,isclosures use, to au,it +ro+erty. +lant. an, e6ui+ment/ To+ic: Tests of Details of Transactions an, Account Balances an, Disclosures ' Pro+erty9 Plant9 an, !6ui+ment

14-40

Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

-.# For each anal tical procedure listed belo), identi$ a potential "isstate"ent in the propert "anage"ent accounts it could help $ind# a# Co"pute the ratio o$ depreciation expense to the related propert , plant, and e!uip"ent accounts and co"pare to prior ears> ratios b# Co"pare "onthl or annual repairs and "aintenance )ith previous ears c# Co"pute ratio o$ insurance expense to the related propert , plant, and e!uip"ent accounts and co"pare to prior ears> ratios a# ?ver/Dnderstate"ent in depreciation expense and accu"ulated depreciation b# Expensing a"ounts that should be capitali3ed c# ?ver/Dnderstate"ent in insurance expense and prepaid insurance

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision 4aking Blooms: Analy;e Difficulty: 1 4e,ium "earning #b$ecti%e: &'(8 )no* the substanti%e analytical +roce,ures use, to au,it +ro+erty. +lant. an, e6ui+ment/ To+ic: Substanti%e Analytical Proce,ures ' Pro+erty9 Plant9 an, !6ui+ment

-/# %here are a nu"ber o$ i"portant disclosure ite"s to consider )hen auditing the propert "anage"ent process# 6ist t)o# :here in the $inancial state"ents can so"e o$ the disclosures relating to propert , plant, and e!uip"ent be $ound; H Classes o$ capital assets and valuation bases H ,epreciation "ethods and use$ul lives $or $inancial reporting and tax purposes H Bon-operating assets H Construction or purchase co""it"ents H 6iens and "ortgages H Ac!uisition or disposal o$ "a=or operating $acilities H Capitali3ed and other lease arrange"ents *o"e o$ these disclosures )ill be $ound in the E*u""ar o$ *igni$icant Accounting PoliciesE $ootnote# ?thers )ill be disclosed in a separate $ootnote#

AACSB: Communication AICPA BB: "egal AICPA FN: Re+orting Blooms: Remember Difficulty: !asy "earning #b$ecti%e: &'(: )no* the tests of ,etails of account balances an, ,isclosures use, to au,it +ro+erty. +lant. an, e6ui+ment/ To+ic: Tests of Details of Transactions an, Account Balances an, Disclosures ' Pro+erty9 Plant9 an, !6ui+ment

14-+2

Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent

-0# 4o) do accounting standards regarding accounting $or the i"pair"ent or disposal o$ long-lived assets a$$ect the audit o$ propert , plant, and e!uip"ent; Accounting standards state that long-lived assets "ust be revie)ed $or i"pair"ent )henever events or changes in circu"stances indicate that the carr ing a"ount "a not be recoverable# %he auditor )ill have to use his/her expertise and =udg"ent )hen auditing these t pes o$ assets# %he auditor can per$or" tests o$ controls over the client>s i"pair"ent evaluation, in!uire and observe the use$ulness o$ long-lived assets and gain an understanding o$ the t pes o$ events that could lead to i"pair"ent $or the client in order to ensure the assets are properl valued#

AACSB: Communication AICPA BB: "egal AICPA FN: Decision 4aking Blooms: 0n,erstan, Difficulty: 1 4e,ium "earning #b$ecti%e: &'(: )no* the tests of ,etails of account balances an, ,isclosures use, to au,it +ro+erty. +lant. an, e6ui+ment/ To+ic: Tests of Details of Transactions an, Account Balances an, Disclosures ' Pro+erty9 Plant9 an, !6ui+ment

.2# Identi$ the t pes o$ transactions that occur in the propert "anage"ent process# %here are $our t pes o$ propert , plant, and e!uip"ent transaction that "a occur# %he include: 1# Ac!uisition o$ capital assets $or cash or other non"onetar considerations# &# ,isposition o$ capital assets through sale, exchange, retire"ent, or abandon"ent# '# ,epreciation o$ capital assets over their use$ul econo"ic li$e# 4# 6easing o$ capital assets#

AACSB: Communication AICPA BB: In,ustry AICPA FN: Decision 4aking Blooms: Remember Difficulty: !asy "earning #b$ecti%e: &'(& )no* the ty+es of transactions in the +ro+erty management +rocess/ To+ic: Ty+es of Transaction ' Pro+erty 4anagement Process

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Chapter 14 - Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Propert , Plant, and E!uip"ent
$atching #uestions

.1# 8atch each o$ the $ollo)ing intangible assets )ith its proper general categor 1# Patented I% progra" &# ?rder bac(logs '# Franchise 4# Cop right +# %rade"ar( 8ar(eting Custo"er Artistic Contract %echnolog . 4 / 1

AACSB: Communication AICPA BB: In,ustry AICPA FN: Decision 4aking Blooms: Remember Difficulty: !asy "earning #b$ecti%e: &'( )no* the %arious ty+es of +re+ai, e-+enses. ,eferre, charges. an, intangible assets/ "earning #b$ecti%e: &'(1 0n,erstan, the au,itor2s a++roach to au,iting +re+ai, insurance an, intangible assets/ To+ic: Au,iting Pre+ai, !-+enses To+ic: Substanti%e Proce,ures ' Pre+ai, Insurance

14-+&