Select the best answer for each of the questions below and explain fully the reason for your selection.

a. With respect to an internal control measure that will assure accountability for fixed asset retirements, management should implement an internal control that includes:

(1) Continuous analysis of miscellaneous revenue to locate any cash proceeds from sale of plant assets.

(2) Periodic inquiry of plant executives by internal auditors as to whether any plant assets have been retired.

(3) Utilization of serially numbered retirement work orders.

(4) Periodic observation of plant assets by the internal auditors.

b. The auditors may conclude that depreciation charges are insufficient by noting:

(1) Insured values greatly in excess of book values.

(2) Large amounts of fully depreciated assets.

(3) Continuous trade-ins of relatively new assets.

(4) Excessive recurring losses on assets retired.

c. Which of the following is an internal control weakness related to factory equipment?
(1) Checks issued in payment of purchases of equipment are not signed by the controller.
(2) All purchases of factory equipment are required to be made by the department in need of the equipment.
(3) Factory equipment replacements are generally made when estimated useful lives, as indicated in depreciation schedules, have expired.
(4) Proceeds from sales of fully depreciated equipment are credited to other income.

d. Which of the following accounts should be reviewed by the auditors to gain reasonable assurance that additions to property, plant, and equipment are not understated?
(1) Depreciation.
(2) Accounts payable.
(3) Cash.
(4) Repairs.

e. When there are numerous property and equipment transactions during the year, an auditor planning to assess control risk at the minimum level usually plans to obtain an understanding of internal control and to perform:
(1) Tests of controls and extensive tests of property and equipment balances at the end of the year.
(2) Extensive tests of current year property and equipment transactions.
(3) Tests of controls and limited tests of current year property and equipment transactions.
(4) Analytical procedures for property and equipment balances at the end of the year.

f. To strengthen internal control over the custody of heavy mobile equipment, the client would most likely institute a policy requiring a periodic:
(1) Increase in insurance coverage.
(2) Inspection of equipment and reconciliation with accounting records.
(3) Verification of liens, pledges, and collateralizations.
(4) Accounting for work orders.