12.The following questions relate to the audit of plant, property, andequipment. Choose the best response.

1)* The audit procedure of analyzing the repairs andmaintenance accounts is designed primarily to provide evidence in support of the audit proposition that all

a.expenditures for fixed assets have been recorded in the proper period.

b.capital expenditures have been properly authorized.

c.noncapitalizable expenditures have been properly expensed.

d.expenditures for fixed assets have been capitalized.

2)*When an entity has few property and equipment transactions duringthe year, the continuing auditor usually carries out

a.a complete review of therelated internalcontrolsand performstests of the controls on which the entity relies.

b.a complete review of the related internal controls and performs analytical review teststo verify current-yearadditions to property and equipment.

c.a preliminary review of the related internal controlsand performs a thoroughexamination of the balances atthe beginning of the year.

d.a preliminary review of therelatedinternal controlsandperforms extensive tests of current-year property and equipment transactions.

3)*An auditor may conclude that depreciation charges are insufficient if he or she notes

a.large amounts of fully depreciated assets.

b.continuous trade-ins of relatively new assets.

c.excessive recurring losses on retired assets.

d.insured values greatly in excess of book values.

4)*Inviolation of company policy, LilacCompany erroneouslycapitalized the cost of painting its warehouse.The auditor examining Lilac's financial statements would be most likely to detect this when

a.discussing capitalization policies with Lilac's controller.

b.examining maintenance expense accounts.

c.noting, while observing the physical inventory being taken, that the warehouse had been painted.

d.examining the construction work orders supporting items capitalized during the year.

5)* Equipment acquisitions that are misclassified as maintenance expense most likely would be detected by an internal control that provides for

a.segregation of duties of employees in the accounts payable department.

b.independent verification of invoices for disbursements recorde d as equipment acquisitions.

c.investigation of variances within a formal budgeting system.

d.authorization by the board of directors of significant equipment acquisitions.

*AICPA Adapted

13.The following questions relate to the investing and financing cycle.Choose the best response.

1)*A company holds bearer bonds as a short -term investment.Responsibility for the custody of these bonds and for the submission of coupons for periodic interest collections probably should be delegated to the

a.chief accountant

b.internal auditor

c.cashier

d.treasurer

2)*A company had temporarily excess funds to invest. The board of directors decided to purchase marketable securities, and it assigned the future purchase and sale decisions to a responsible financial executive. The bestperson(s) to make periodic reviews of the investment activity would be the

a.investment committee of the board of directors

b.treasurer

c.corporate controller

d.chief operating officer

3)*If an auditor is unable to inspect and count a client's investment securitie s until after the balance sheet date, the bank in which the securities are held in a safe deposit box should be asked to

a.verify any differences between the contents of the box and the balances in the client's subsidiary ledger.

b.provide a list of securities added to and removed from the box between the balance sheet date and the security count date.

c.confirm that there has been no access to the box between the balance sheet date and the security count date.

d.count the securities in the box so the auditor will have an independent direct verification.

4)*Which of the following would provide the best form of evidence pertaining to the annual valuation of a long-term investment in which the independent auditor's client owns a 30 percent voting interest?

a.Market quotations of the investee company's shares

b.Current fair value of the investee company's assets

c.Historical cost of the investee company's assets

d.Audited financial statements of the investee company

5)*If a corporation employs no independent share transferagents, and it issues its own shares and maintains its share records, canceled share certificates should

a.be defaced to prevent reissuance and be reattached to their corresponding stubs.

b.not be defaced but should be segregated from other share certificatesand retained in a canceled-certificates file.

c.be destroyed to prevent fraudulent reissuance.

d.be defaced and sent to the government office that issued the corporate charter.

6)*Which of the following controls is most likely to prevent the improper disposition of equipment?

a.Separating duties between those authorized to dispose of equipment and those authorized to approve removal work orders

b.Using serial numbers to identify equipment that could be sold

c.Periodically comparing removal work orders with authorizing documentation

d.Periodically analyzing scrap sales and the repairs and maintenance accounts

*AICPA Adapted

14.The following questions relate to investing in properly, plant, andequipment. Choose the best response.

1)*An auditor could most efficiently testfor the misclassification of capital acquisitions expenditures by

a.taking a physical tour of plant facilities before starting an audit.

b.reviewing company capital acquisition policies with purchasing personnel.

c.tracing capital additions back to source documents.

d.scanning repair and maintenance records and investigating large peso-value entries.

2)*The most significant audit step in substantiating additions to office fumitureis

a.examining vendor's invoices and receiving reports for current- year acquisitions.

b.reviewing transactions near balance sheet date for proper period cutoff.

c.calculating ratio of depreciation expense to gross office equipment cost.

d.computing current-year acquisitions to prior-year acquisitions.

3)*One control objective of the investing and financing cycle is the proper authorization of company transactions dealing with debt and equity instruments. Which of the following controls would best meet this objective?

a.Separating responsibility for custody of funds from responsibility for recordin g the transactions

b.Maintaining written company policies that require the board of directors to review major funding or repayment proposals

c.Using an underwriter in all cases of new issue of debt or equity instruments

d.Requiring two signatures on all organization checks of a material amount

*IIA Adapted

15.The following questions relate to investing in debt and equity securities. Choose the best response.

1)*A company makes a practice of investing excess short-term cash in marketable securities. A reliable test of the valuation of those securities is

a.comparing cost data with current market quotations.

b.confirming securities held by the broker.

c.recalculating investment carrying value using the equity method.

d.calculating premium or discount amortization.

2)*A company invests material amounts of idle cash in marketable securities. The auditor has reason to believe that suboptimal use is being made of the idle cash.Which of the following procedures would provide the most reliable evidence relative to this concern?

a.Computing rate of return earned on investments and comparing it with alternative investments

b.Reviewing minutes of the meetings of the company's investment committee

c.Confirming the security transactions and income received bycontacting the company's independent share brokers

d.Comparing actual with budgeted investment income earned

3)No employee should be able to visit the corporate safe deposit boxcontaining investment securities without being accompanied by another corporate employee. What consequence might follow if this rule were not enforced?

a.An employee could pledge corporate investments as security for a short-term personal bank loan.

b.An employee could steal securities and the theft would never be discovered.

c.It would be impossible to get a fidelity bond on the employee.

d.There would be no record of when company personnel visited the safe deposit box.

4)*In establishing the existence and ownershi p of a long-term investment in the form of publicly traded shares, an auditor should inspect the securities or

a.correspond with the investee company to verify the number of shares owned.

b.inspect the audited financial statements of the investee company.

c.confirm the number of shares owned that are held by an independent custodian.

d.determine that the investment is carried at the lower of cost or market.

*AICPA Adapted

16.The following multiple-choice questions concern interest-bearingliabilities. Choose the best response.

1)The auditor's program for the examination of long-term debt should include steps that require the

a.Verification of the existence of the bondholders

b.Examination of any bond trust indenture

c.Inspection of the accounts payable master file

d.Investigation of credits to the bond interest income account

2)During the year under audit, a company has completed a private placement of a substantial amount of bonds. Which of the following is the most important step in the auditor's program for the examination of bonds payable?

a.Confirming the amount issued with the bond trustee.

b.Tracing the cash received from the issue to the accounting records.

c.Examining the bond records maintained by the transfer agent.

d.Recomputing the annual interest cost and the effective yield.

3)Several years ago, Conway Inc., secured a conventional real estate mortgage loan. Which of the following audit procedures would be least likely to be performed.by an auditor examining the mortgage balance?

a.Examine the current years' canceled checks.

b.Review the mortgage amortization schedule.

c.Inspect public records of lien balances.

d.Recompute mortgage interest expense.