Multiple Choice Questions
The following questions concern the audit of liabilities or income and expense accounts. Choose the best response.
a. The auditor may note that annual depreciation expense is too low for a class of assets by noting
(1) Insured values greatly in excess of carrying amounts.
(2) Large numbers of fully depreciated assets are still in use.
(3) Continuous trade-ins of relatively new assets.
(4) Excessive recurring losses on assets retired.
b. Which of the following best describes the independent auditor’s approach to obtaining satisfaction concerning depreciation expense in the income statement?
(1) Verify the mathematical accuracy of the amounts charged to income as a result of depreciation expense.
(2) Determine the method for computing depreciation expense and ascertain that it is in accordance with accounting standards.
(3) Reconcile the amount of depreciation expense to those amounts credited to accumulated depreciation accounts.
(4) Establish the basis for depreciable assets and verify the depreciation expense.
c. Before expressing an opinion concerning the audit of income and expenses, the auditor will best proceed with the audit of the income statement by
(1) Applying a rigid measurement standard designed to test for understatement of net income.
(2) Analyzing the beginning and ending balance sheet inventory amounts.
(3) Making net income comparisons to published industry trends and ratios.
(4) Auditing income statement accounts concurrently with the related balance sheet accounts.