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Failure to capitalize a fixed asset at the correct amount affects __________ until the company disposes of the asset. a. the balance sheet only b. the income statement only c. the cash flow statement only d. both the income statement and the balance sheet 2. In rare cases, the auditor may believe it is necessary that a complete physical inventory of fixed assets be taken to make sure they actually exist. If an inventory is taken, the auditor normally: a. takes the inventory. b. requires client to take the inventory and provide documentation to the auditor. c. observes the count. d. requires that it be done by an outside, independent third party. 3. A major consideration in verifying the ending balance in fixed assets is the possibility of existing legal encumbrances. Tests to identify possible legal encumbrances would satisfy the audit objective of: a. existence. b. presentation and disclosure. c. detail tie-in. d. classification. 4. When auditing depreciation expense, the two major concerns related to the accuracy audit objective are: a. consistent application of depreciation method and useful lives. b. consistent application of depreciation method and classification of assets. c. correctness of calculations and consistent application of depreciation method. d. cost of the fixed asset and useful lives. 5. The auditor ___________ to test the accuracy or classification of fixed assets recorded in prior periods. a. normally needs b. never needs c. normally does not need d. is required 6. The auditor normally does not need to test the accuracy or classification of fixed assets recorded in prior periods because: a. they are rarely material to the audit. b. they rarely contain misstatements. c. they are verified in previous audits. d. they dont affect the balance sheet. 7. To auditors may conclude that depreciation charges are insufficient by noting: a. Insured values greatly in excess of book values b. Large amounts of fully depreciated assets c. Continuous trade-ins of relatively new assets d. Excessive recurring losses on assets retired 8. The failure to capitalize a permanent asset, or the recording of an asset acquisition at the improper amount, affects the balance sheet a. For the current period b. For the depreciable life of the asset c. Until the firm disposes of the asset d. Forever 9. The failure to capitalize a permanent asset, or the recording of an asset acquisition at the improper amount, affects the income statement a. For the current period b. For the depreciable life of the asset c. Until the firm disposes of the asset d. Forever 10. The erroneous inclusion of transactions that should properly be recorded as assets into accounts such as repairs expense, lease expense, or supplies is a common client error. The auditor should evaluate the likelihood of these types of misclassifications in conjunction with a. Obtaining an understanding of the internal control structure b. The test of controls

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c. The test of transactions d. The test of details of balances If the auditor believes there is a high likelihood of significant missing permanent assets that are still recorded on the accounting records, an appropriate procedure is to select a sample from the assets master file and examine a. The documents verifying their acquisition b. The assets c. All the related journal entries d. The accumulated depreciation calculations Property, plant and equipment are assets that: a. Have expected lives of more than one year b. Are used in the business c. Are not acquired for resale d. Meet all of the requirements stated above Which of the following is not a category of tests commonly associated with the audit of manufacturing equipment? a. Verification of depreciation expense b. Analytical procedures c. Verification of current-period disposals d. Verification of the beginning balance in accumulated depreciation A term used to describe managements recognition that a significa nt portion of fixed assets is no longer as productive as had originally been expected a. Asset recognition b. Asset impairment c. Discontinued operations d. Wasted productivity Expense accounts analysis is closely related to tests of controls and substantive tests of transactions. The major difference is: a. The difference in the types of underlying documentation which is examined b. The degree of concentration on an individual account c. The use or nonuse of cutoff tests d. That one emphasizes transactions and the other emphasizes amounts To achieve effective internal accounting control over fixed asset additions, a company should establish procedures that require: a. Authorization and approval of major fixed asset additions b. Capitalization of the cost of fixed asset additions in excess of a specific dollar amount c. Classification, as investments, of those fixed asset additions that are not used in the business d. Performance of recurring fixed asset maintenance work solely by maintenance department employees Which of the following is a customary audit procedure for the verification of the legal ownership of real property? a. Examination of correspondence with the corporate counsel concerning acquisition matters b. Examination of ownership documents registered and on file at the public hall of records c. Examination of corporate minutes and resolutions concerning the approval to acquire property, plant and equipment d. Examination of deeds and title guarantee policies on hand An auditor would be least likely to use confirmations in connection with the examination of: a. Inventories b. Long-term debt c. Property, plant and equipment d. Stockholders equity

-------SPECIAL TOPICS Intangible assets 1. Statement 1: Legal costs for obtaining and defending a patent are capital expenditures if the defense is successful.

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Statement 2: If the defense of the patent is not successful, the patent still has a value and should be capitalized. a. Only statement 1 is false b. Only statement 2 is false c. Both are false d. Both are true TRUE OR FALSE. The cost of patents should amortized over their legal life or their estimated useful life, whichever is longer. Answer: FALSE, shorter In auditing patents, an intangible asset, an auditor most likely would review or recomputed amortization and determine whether the amortization period is reasonable. This procedure would support which of the managements assertions? a. Valuation b. Existence c. Completeness d. Rights

Natural Resources 4. The following are unique problems presented by natural resources, except: a. It is often difficult to identify the costs associated with discovery of the natural resource b. Reclamation costs may be difficult to estimate c. It is often difficult to estimate the amount of commercially available resources to be used in determining a depletion rate d. None of the above 5. The expense associated with the extraction of natural resources is called a. Depreciation b. Reclamation c. Depletion d. Extrapolation 6. Depletion expense should be based on the items extracted during the year using the a. Straight line method b. Units of production method c. Sum-of-the-years-digits method d. Declining balance method 7. In which of the following situations will an auditor least likely rely on a specialist? a. The estimation of oil and gas reserves b. The interpretation of contracts, laws, and regulations c. The calculation of interest expense d. The valuation of land and buildings, plant and machinery, and intangible assets 8. Costs associated with restoring land used in mining to an agreed-upon natural state that reflects safeguards to protect the environment a. Restoration expenses b. Environmental costs c. Reclamation expenses d. Mining costs 9. Statement 1: All reclamation expenses associated with restoring the property to its original state should be estimated and accrued. Statement 2: Reclamation expenses should be amortized against the use of the natural resources as part of the depletion expense. a. Both statements are false b. Only Statement 1 is true c. None of the statements are false d. Only Statement 1 is false Leases Motivation to Lease 10. Which of the following is a reason for companies to engage in leasing transactions?

To finance the use of the asset instead of making an outright purchase To maintain a flexible operating profile To acquire the use of an asset for an extended period of time, but keep the asset and related liability off the balance sheet d. All of the above 11. The audit approach for leases starts with ______________ to assure proper recording of leases. a. Establishing audit objectives b. An analysis of controls the company uses c. Reviewing clients disclosures d. Testing the clients schedule 12. Leases must be capitalized if at least one of the four conditions is satisfied. Which of the following is not one of the four conditions? a. the present value of the minimum lease payments is at least equal to 90% of the assets fair market value b. the lessee can acquire title to the asset at the end of the lease for a bargain purchase price c. the lease term covers at least 90% of the useful life of the asset d. the lease transfers ownership to the lessee by the end of the lease term 13. 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 lease obligation d. Future minimum lease obligations are not required to be disclosed

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