Accounting Chapter 19 Quiz
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Questions and Answers

Which of the following accounts is associated with a transaction cycle other than acquisition and payment?

  • Property, plant and equipment
  • Income tax expense
  • Common stock (correct)
  • Accrued property taxes

    • Property, plant, and equipment are recognized as assets that:

  • Have expected lives of more than six months
  • Have expected lives of more than one year and are used in the business (correct)
  • Sheer bulk requires special handling
  • Are primarily for resale

    • Which of the following expenses is least likely to be evaluated during an audit of the acquisition and payment cycle?

  • Depreciation expense
  • Insurance expense
  • Utility expenses
  • Bad debts expense (correct)

    • Debits recorded for manufacturing equipment arise primarily from which transaction cycle?

    <p>Acquisition and disbursement</p> Signup and view all the answers

    When it comes to verifying additions to property, plant, and equipment, which approach is typically taken?

    <p>Verify a representative sample of typical additions</p> Signup and view all the answers

    To ensure proper capitalization of acquisitions, which policies must the auditor be familiar with?

    <p>The client's capitalization policies</p> Signup and view all the answers

    Which of the following is a requirement for an asset to be capitalized as property, plant, and equipment?

    <p>Not be intended for sale</p> Signup and view all the answers

    The primary accounting record for fixed assets such as manufacturing equipment is known as what?

    <p>Fixed asset master file</p> Signup and view all the answers

    Which statement about the audit of fixed assets is not correct?

    <p>Manufacturing equipment and current assets are audited differently based on account activity.</p> Signup and view all the answers

    What should an auditor consider when auditing prepaid insurance?

    <p>The average premium payment across years.</p> Signup and view all the answers

    Which category is not commonly associated with the audit of manufacturing equipment?

    <p>Verification of current-period purchases.</p> Signup and view all the answers

    Which balance-related audit objective does 'footing the acquisition schedule' relate to?

    <p>Detail tie-in.</p> Signup and view all the answers

    Which audit objective is not major in current year fixed asset additions?

    <p>Valuation.</p> Signup and view all the answers

    The extent of verification of current period acquisitions of property, plant, and equipment depends on:

    <p>Both assessed control risk and tolerable misstatement.</p> Signup and view all the answers

    Inadequate controls and misstatements indicate likelihood in which statement?

    <p>The balance sheet.</p> Signup and view all the answers

    Failure to capitalize a fixed asset at the correct amount affects what until disposed of?

    <p>The income statement.</p> Signup and view all the answers

    What must an auditor evaluate to reduce the likelihood of misclassifications of transactions as expenses instead of assets?

    <p>Understanding of internal control</p> Signup and view all the answers

    What happens to the original cost and net book value if a client fails to record disposals of property, plant, and equipment?

    <p>The original cost will be overstated indefinitely, and the net book value will be overstated until the asset is fully depreciated</p> Signup and view all the answers

    Which procedure would typically verify income statement accounts resulting from allocations?

    <p>Substantive tests of transactions</p> Signup and view all the answers

    Which reason could an auditor accept for significant debits to an accumulated depreciation account?

    <p>Extraordinary repairs have lengthened the life of an asset</p> Signup and view all the answers

    In which area would an auditor most likely not use confirmations?

    <p>Property, plant, and equipment</p> Signup and view all the answers

    What is a critical internal control procedure over acquisitions of property, plant, and equipment?

    <p>Establishing a policy differentiating capital and revenue expenditures</p> Signup and view all the answers

    If asset disposals are not recorded, what is the status of net book value?

    <p>Understated indefinitely</p> Signup and view all the answers

    Which option best describes a potential effect of failure to record capital expenditures?

    <p>Expenses will be overstated</p> Signup and view all the answers

    What is the primary support for an audit conclusion that an auditor may rely on from interviewing the plant manager?

    <p>Capitalization vs. expensing policy</p> Signup and view all the answers

    How do audit procedures for verifying accrued liabilities differ from those for accounts payable?

    <p>Accrued liabilities typically involve ongoing services</p> Signup and view all the answers

    In the context of a first-year audit engagement, what is true regarding the level of risk and required audit work?

    <p>More audit work is needed than in subsequent years</p> Signup and view all the answers

    What is usually considered an auditor’s primary objective when auditing manufacturing equipment?

    <p>Completeness and existence of the equipment</p> Signup and view all the answers

    Which characteristic primarily distinguishes property, plant, and equipment from other business assets?

    <p>Intention to use in business operations</p> Signup and view all the answers

    What is emphasized in the audit of manufacturing equipment regarding disposals?

    <p>Verification of current-period disposals</p> Signup and view all the answers

    What is the nature of the amount recorded in insurance expense, according to auditing principles?

    <p>Residual amount after treatments are applied</p> Signup and view all the answers

    When auditing prepaid insurance or insurance expense, which audit objective is not applicable?

    <p>Realizable value</p> Signup and view all the answers

    Which audit procedure is directly related to the accuracy objective for fixed assets acquisitions?

    <p>Trace total acquisitions to the general ledger</p> Signup and view all the answers

    What primary audit objectives are essential when auditing accrued property taxes?

    <p>Completeness and accuracy</p> Signup and view all the answers

    Which method is commonly used to assess the reasonableness of depreciation?

    <p>Perform an analytical procedure</p> Signup and view all the answers

    How does recording a fixed asset at an improper amount primarily affect financial reporting?

    <p>It affects only the balance sheet until disposal</p> Signup and view all the answers

    In auditing insurance expense, which approach do auditors typically rely on?

    <p>Analytical procedures and limited testing</p> Signup and view all the answers

    When auditing property, plant, and equipment acquisitions, which aspect is primarily evaluated through lease and rental agreements?

    <p>Cutoff objective</p> Signup and view all the answers

    What is the typical approach towards testing fixed assets acquired in previous years?

    <p>Usually unnecessary for accuracy and classification</p> Signup and view all the answers

    What is the main method for verifying income statement accounts associated with allocations?

    <p>Analytical procedures</p> Signup and view all the answers

    What is the starting point for verifying current-year acquisitions of property, plant, and equipment?

    <p>Client-prepared schedule of acquisitions</p> Signup and view all the answers

    Which audit test is the least common for verifying current period acquisitions of property, plant, and equipment?

    <p>Examining vendors' invoices</p> Signup and view all the answers

    How is depreciation expense typically verified during an audit?

    <p>As part of tests of details of balances</p> Signup and view all the answers

    What is the most important audit objective for depreciation expense?

    <p>Accuracy</p> Signup and view all the answers

    Which procedure is commonly used in auditing insurance expense?

    <p>Analytical procedures and brief tests</p> Signup and view all the answers

    Which audit objective is rarely performed by auditors concerning prepaid insurance?

    <p>Cutoff</p> Signup and view all the answers

    What balance-related audit objective is not used in auditing current year acquisitions of property, plant, and equipment?

    <p>Realizable value</p> Signup and view all the answers

    In deciding the useful life of an asset, how significant is the company's policy considered?

    <p>Relatively unimportant</p> Signup and view all the answers

    Study Notes

    Multiple-Choice Questions - Chapter 19

    • Question 1: Property, plant, and equipment are assets used in a business with expected lives longer than one year and not intended for resale. All these criteria must be met.
    • Question 2: Property, plant and equipment accounts are associated with a transaction cycle other than acquisition and payment (e.g. accrued property taxes, income tax expense)
    • Question 3: Depreciation expense, insurance, and property tax expenses are typically evaluated during an audit of the acquisition and payment cycle. Bad debts expense is not typically part of this cycle evaluation.
    • Question 4: Manufacturing equipment debits originate from the acquisition and disbursement cycle, and the sales and collection cycle.
    • Question 5: Verification of representative samples of typical additions to property, plant, and equipment is a common audit procedure; verifying all unusual and large transactions is also included.
    • Question 6: Capitalization policies of clients are often evaluated to determine if acquisitions are recorded in accordance with GAAP and consistently with prior years' procedures.
    • Question 7: To be capitalized as property, plant, and equipment, assets must have expected useful lives for more than one year and not intended for resale; often assets are used for multiple operational purposes.
    • Question 8: The primary accounting record for manufacturing equipment and other fixed assets is the fixed asset master file.
    • Question 9: The fixed asset master file is the primary record for manufacturing equipment and property, plant, and equipment. Manufacturing equipment and current assets are typically audited independently of each other. Emphasize on verification of current-period acquisitions of fixed assets.
    • Question 10: The prepaid insurance amount is based on the beginning balance in prepaid insurance, payments made throughout the year, and the ending balance in prepaid insurance. All contribute to the overall account.
    • Question 11: Verification of beginning balances in accumulated depreciation is not a typical category of tests during a manufacturing equipment audit.
    • Question 12: The audit procedure of "footing the acquisition schedule" relates to verifying the correct inclusion of details in the acquisition schedule, which relates to the detail tie-in objective.
    • Question 13: Existence is not typically a major objective in the audit of current-year fixed asset additions.
    • Question 14: The extent of current-period acquisition verification depends on assessed control risk for acquisitions and tolerable misstatement.
    • Question 15: Inadequate controls and misstatements, identified through tests of controls and substantive tests of transactions, indicate misstatement risk in both the balance sheet and income statement.
    • Question 16: Failure to capitalize fixed assets correctly affects both the income statement and balance sheet.
    • Question 17: Tracing, footing, and schedule-total-to-general-ledger tracing are necessary procedures in auditing recorded disposals.
    • Question 18: Verifying current-year additions, observing current-year disposals, and performing analytical procedures are typical manufacturing equipment audit tests.
    • Question 19: The fixed asset master file is a record including acquisition date, original cost, annual depreciation, and accumulated depreciation for each piece of equipment.
    • Question 20: Verifying the beginning, current-year acquisitions, current-year disposals, and ending balances are typical categories when auditing property, plant, and equipment.
    • Question 21: Reading loan confirmations and reviewing loan and credit agreements for legal encumbrances are methods relevant to identifying legal encumbrances related to fixed assets.
    • Question 22: Recalculating investment credit satisfies the accuracy objective for fixed assets.
    • Question 23: Examining vendors' invoices for repairs to uncover items that should be property, plant, and equipment satisfies the classification objective.
    • Question 24: The starting point for verifying disposals is the client's schedule of recorded disposals.
    • Question 25: Failure to capitalize a fixed asset correctly affects both the income statement and balance sheet until the asset is fully depreciated.
    • Question 26: Verifying disposals includes inquiries about disposal possibilities, reviewing whether newly acquired assets replace existing ones, and auditing the valuation of prior-period fixed assets.
    • Question 27: A major consideration in verifying the ending balance is the possibility of existing legal encumbrances; verifying them satisfies the presentation and disclosure objective.
    • Question 28: Consistent application of depreciation method and accuracy of calculations are the typical concerns when auditing depreciation.
    • Question 29: Analytical procedures are frequently used for auditing prepaid expenses and deferred charges.
    • Question 30: Analytical procedures are often sufficient for auditing prepaid expenses and deferred charges.
    • Question 31: Depreciation expense is not usually part of the tests of controls.
    • Question 32: Changing circumstances, like useful life changes, are accounted for as changes in accounting estimates, not accounting principles.
    • Question 33: The auditor does not need to constantly verify the accuracy of previously recorded fixed assets, as this is done in prior-year audits.
    • Question 34: Fixed asset records from prior years are rarely material and are usually verified in prior audits.
    • Question 35: Internal controls for prepaid insurance involve controls over the acquisition, recording, insurance register, and charge-off of insurance expense.
    • Question 36: The insurance register contains a record of insurance policies in force and their due dates.
    • Question 37: Insurance expense in a period is the function of the beginning prepaid balance, current payments, end prepaid balance, and current period premium payments.
    • Question 38: The main difference between expense account analysis and substantive tests of transactions is the level of concentration on individual accounts; the test of expense balances emphasizes the accuracy of amounts, not transactions per se.
    • Question 39: Confirming premium rates with an independent insurance broker isn't necessarily part of a prepaid insurance audit procedure.
    • Question 40: Reviewing repairs and maintenance expense is unlikely to reveal unrecorded fixed asset disposals.
    • Question 41: Authorization and approval requirements for major fixed asset additions are an important control for acquisitions of property, plant, and equipment.
    • Question 42: Examination of the corporate minutes, deeds, and title guaranty policies concerning acquisition matters usually verifies legal ownership of real property.
    • Question 43: Prior years' capitalization costs are of less concern to the continuing auditor than capitalization policy, depreciation methods, or depreciable life.
    • Question 44: Controls over acquisition and recording of insurance are part of the acquisition and payment cycle.
    • Question 45: The approach to verifying manufacturing equipment differs from other property, plant, and equipment, as manufacturing equipment often is a more substantial and involved audit procedure, requiring more detail work.
    • Question 46: The rights objective is not relevant to the audit of prepaid expenses.
    • Question 47: Failure to capitalize a fixed asset affects the balance and income statement for the period during which it is used, but not indefinitely.
    • Question 48: Failure to capitalize a permanent asset affects the income statement over the depreciable life of the asset.
    • Question 49: Both analytical procedures and substantive tests of transactions can simultaneously verify balance sheet and income statement accounts.
    • Question 50: Examining vendors' invoices of related accounts satisfies the completeness objective for fixed assets.
    • Question 51: Misclassifying transactions as repairs or expense instead of assets requires an understanding of internal control to evaluate the likelihood of misclassifications further.
    • Question 52: Both the original cost and net book value of an unrecorded disposal will be overstated indefinitely.
    • Question 53: Income statement accounts resulting from allocation are verified through analytical procedures.
    • Question 54: Significant debits to accumulated depreciation are often explained by extraordinary repairs, errors in prior-year depreciation, asset retirement reserves, or recognizing an asset at fair value.
    • Question 55: Confirmations are not the preferred method for examining fixed assets, particularly when used for current-period acquisitions.
    • Question 56: A critical control procedure for property acquisitions is a formal written company policy clarifying capital vs. revenue expenditures.
    • Question 57: Interviewing the plant manager is useful for gauging the capitalization vs. expensing policy and its application.
    • Question 58: Supporting documentation for accrued liabilities is often less readily available than for accounts payable, and accrued liabilities typically relate to ongoing services.
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    • Question 75: True - First-year engagements require more work.
    • Question 76: True - Accuracy is a primary objective.
    • Question 77: True - Completeness and existence are relevant.
    • Question 78: True - Wages are part of acquisition and payment cycle.
    • Question 79: True - Property, plant, and equipment, for accounting purposes, have longer useful lives than inventories.
    • Question 80: True - Verification of current-period equipment acquisitions is a key focus.
    • Question 81: True - Insurance expense is a residual amount.
    • Question 82: True - Realizable value is not directly relevant to this account.
    • Question 83: True - Client schedules are the starting point for current-year acquisition verification.
    • Question 84: False - Examining invoices and receiving reports is a common procedure.
    • Question 85: True - Depreciation is usually part of balance sheet tests.

    Note: Some questions have multiple parts; this summary addresses the main factual points. If you need a deeper dive into particular questions, please specify.

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    Description

    Test your knowledge on Property, Plant, and Equipment as covered in Chapter 19. This quiz examines various accounting principles and transactions related to long-term assets, including depreciation expenses and audit procedures. Challenge yourself to accurately answer the multiple-choice questions based on these important concepts.

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