1.

Audit of Fixed Assets- Theory

The failure to capitalize a permanent asset, or the recording of an asset acquisition at the improper amount affects the
statement of financial position
a. For the current period.
b. Until the firm disposes the asset.
c. For the depreciable life of the asset.
d. Forever.

2.

The failure to record 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. Until the firm disposes of the asset.
c. For the depreciable life of the asset.
d. Forever.

3.

The test of details of balances procedure which physically examines the asset is done to test to satisfy the audit objective of
a. Classification
c. Cutoff
b. Completeness
d. Validity

4.

The most common audit test to verify the additions to manufacturing equipment is examination of vendors invoices and
receiving reports. This process is known as
a. Verifying
c. Dual referencing
b. Cross referencing
d. Vouching

5.

Because the failure to record disposals of manufacturing equipment can significantly affect the financial statements, the
search for unrecorded disposals is essential. Which of the following is not a procedure used to verify disposal?
a. Make inquiries of management and production personnel about the possibility of the disposal of assets.
b. Review whether newly acquired assets replace existing assets.
c. Test the valuation of fixed assets recorded in prior periods.
d. Review plant modifications and changes in product line, taxes, or insurance coverage.

6.

After assessing the control risk, the auditor must decide whether it is necessary to verify the documents supporting the
individual items of manufacturing equipment included in the master file. This audit procedure, if performed would satisfy the
audit objective of
a. Valuation
c. Validity
b. Classification
d. Mechanical accuracy

7.

If the auditor believes there is a high of significant missing permanent assets that are still unrecorded on the accounting
records, an appropriate procedure is to select a sample from assets master file and examine
a. The documents verifying their acquisition.
b. All the related journal entries.
c. The assets.
d. The accumulated depreciation calculations.

8.

A major consideration in verifying the ending balance in permanent assets is the possibility of existing legal encumbrances.
Test to identify possible legal encumbrances would satisfy the audit objective for
a. Validity
c. Disclosure
b. Classification
d. Mechanical accuracy

9.

Occasionally, changing circumstances may necessitate a reevaluation of the useful life of an asset. When this occurs, it
involves a change in
a. Accounting estimate rather a change in accounting policy.
b. Accounting policy rather than a change in accounting estimate.
c. Both accounting policy and accounting estimate.
d. Neither accounting policy nor accounting estimate.

10. In verifying accumulated depreciation, the credits to accumulated depreciation are verified as part of the audit of
depreciation expense, whereas the debits are normally tested as part of the audit of
a. Asset acquisitions
c. Disposal of assets
b. Capital acquisitions
d. Accumulated Depreciation
11. The
a.
b.
c.
d.

auditor is most likely to rely to the interview of a plant manager as primary support for an audit conclusion regarding:
Allocation of fixed and variable costs.
The necessity to record a provision for deferred maintenance costs.
Capitalization vs. expensing policy
The adequacy of the depreciation expense.

12. In testing the monetary amounts of acquisition recorded in the property ledger, the auditor would most likely examine
purchase
a. Approvals
b. Requisition
c. Invoices
d. Orders

13. When auditing prepaid insurance, an auditor discovers that that the original insurance policy on plant equipment is not
available for inspection. The policys absence most likely indicates the possibility of a (an)
a. Insurance premium due but not recorded.
b. Deficiency in the co-insurance provision.
c. Lien on the plant equipment.
d. Understatement of insurance expense.
14. The audit procedure of analyzing the repairs and accounts is primarily designed to provide evidence in support of the audit
proposition that all
a. Expenditures for fixed assets have been recorded in proper period.
b. Capital expenditures have been properly authorized.
c. Non-capitalizable expenditures have been properly expensed.
d. Expenditure for fixed assets had been capitalized.
15. The controller of SM Manufacturing Inc. wants to use ratio analysis to identify the possible existence of idle equipment or
the possibility that has been disposed of. What ratio would best accomplish this objective?
a. Depreciation expense/book value of manufacturing equipment.
b. Accumulated depreciation/book value of manufacturing equipment.
c. Repairs and maintenance cost/direct labor costs.
d. Gross manufacturing equipment cost/units produced.
16. To achieve effective internal control over fixed asset additions, a company should establish procedures that require:
a. Authorization and approval of major fixed asset additions.
b. Classification as investments of those fixed asset additions that are not used in the business.
c. Capitalization of the cost of fixed asset additions in excess of a specific dollar amount.
d. Performance of recurring fixed asset maintenance work solely by company department employees.
-END-