Multiple Choice Questions
1. Which of the following is not a risk related to fixed-asset accounts?
a. Failing to record asset disposals.
b. Capitalizing repairs and maintenance expense.
c. Treating capital leases as if they were operating leases.
d. Changing depreciation estimates to manage earnings.
e. All of the above are risks.
2. Which of the errors or questionable practices is most likely to be detected by a tour of the production facility?
a. Insurance coverage on the facility has lapsed.
b. Overhead had been over applied.
c. Necessary facility maintenance has not been performed.
d. Depreciation expense on fully depreciated machinery has not been recognized.
3. A company keeps its fixed-asset records on a computer system. A unique, nine-digit, fixed-asset identification number identifies each record in the file. The remaining fields describe the asset, its acquisition date, cost, economic life, depreciation method, and accumulated depreciation. Which of the following audit procedures could not be performed using generalized audit software?
a. Select a sample of assets to be used in verifying existence of the asset.
b. Recompute accumulated depreciation.
c. Verify economic life by determining it is in the proper asset class.
d. Foot the cost and accumulated depreciation fields, and trace the totals to the client's general ledger.
4. A weakness in internal control over recording retirements of equipment may cause an auditor to:
a. Inspect certain items of equipment in the plant and trace those items to the accounting records.
b. Foot the subsidiary ledger and agree it to the general ledger.
c. Trace additions to the "other assets" account to search for equipment that is still on hand but no longer being used.
d. Select certain items of equipment from the accounting records and locate them in the plant.
5. The auditor may conclude that depreciation charges are insufficient by noting:
a. Large amounts of fully depreciated assets
b. Continuous trade-ins of relatively new assets
c. Excessive recurring losses on assets retired
d. Insured values greatly in excess of book values
6. Which of the following would not indicate possible asset impairment?
a. Unexpected obsolescence
b. Replacement costs have increased
c. Significant change in planned production
d. Damage caused by a natural disaster
7. In auditing patents, an intangible asset, an auditor most likely would review or recompute amortization and determine whether the amortization period is reasonable in support of management's financial statement assertion of:
a. Valuation
b. Existence
c. Completeness
d. Rights
8. Which of the following is true of capitalized leases as compared to operating leases?
a. Only rent expense is reflected in the income statement.
b. The leased asset does not appear on the balance sheet.
c. Liabilities include the lease obligation.
d. Future minimum lease obligations are not required to be disclosed.