Exam Questions Auditing Inventories And Property, Ch12

CHAPTER 12

AUDITING INVENTORIES AND PROPERTY, PLANT, AND EQUIPMENT

CHAPTER LEARNING OBJECTIVES

1. Identify the audit objectives applicable to inventories.

The key issues in auditing inventory are usually to ensure the inventories actually exist, are owned, and are properly valued. The auditor’s objective is to gather sufficient and appropriate evidence about each key assertion.

2. Describe the functions and control procedures normally found for the custody of inventory and maintenance of inventory records.

The key control over the maintenance of inventory is the segregation of duties. The duty of recording inventory movements should be segregated from the physical custody of inventory as goods move in and out of inventory and are transferred between areas.

A key control over the custody of the inventory is the performance of the cyclical and annual inventory counts. Inventory counts are the responsibility of management and they should be well planned to ensure count results are reliable. A comparison of the count results to the accounting records indicates whether the controls over inventory are effective.

3. Discuss considerations relevant to determining the audit strategy for inventories.

Inventories and cost of sales are usually significant to most entities’ financial position and the results of their operations. The main inherent risks for inventory are the existence or occurrence assertion and the accuracy, valuation and allocation assertions. Numerous factors contribute to the inherent risk of misstatements, including the high volume of transactions, contentious valuation issues, and the high risk of theft and obsolescence.

Assessment of control risk is important where the entity does not plan to perform an inventory count at year end and for the cost of inventory for manufacturing entities. If test counts do not support an assessment of control risk as low, or if it is not an efficient audit strategy, the auditor will adopt a substantive audit strategy.

4. Design a substantive audit program for inventory.

Except where perpetual records are used as the basis for determining inventory at the end of the reporting period, and for costing records in manufacturing entities, the audit for inventories is based mainly on substantive procedures applied to the account balance at the end of the reporting period.

The emphasis is on the assertions of existence and valuation, because the inherent risk of their misstatement is always high. In verifying the existence of inventories, the auditor relies on physical inspection, whether through observation of cyclical counts verifying perpetual inventory records or through attendance at annual inventory counts. For valuation, the auditor verifies the cost of inventory against invoice prices or costing records.

The auditor also needs to ensure that the accounting basis adopted complies with applicable accounting standards and that required disclosures are properly made in the financial statements.

5. Identify the audit objectives applicable to property, plant, and equipment.

The key issues in auditing property, plant, and equipment are usually to gather sufficient and appropriate evidence as to the existence of the assets as well as whether the assets are owned and are properly valued with adequate provision for depreciation. Furthermore, a key focus in the audit of property, plant, and equipment relates to the purchasing of new assets and disposing of old assets, including any profits or losses on sale. In addition, consideration is required in relation to depreciation charges, the treatment of leased assets, and asset revaluations.

6. Discuss considerations relevant to determining the audit strategy for property, plant, and equipment.

There may be significant variations in the inherent risk assessments for assertions relating to different property, plant, and equipment accounts and the type of industry. For example, inherent risk for the existence assertion may be low in a merchandising entity because the plant and equipment are not normally vulnerable to theft.

Because transactions relating to property, plant, and equipment are few and usually individually material, assessment of control risk relating to these transactions is rarely necessary.

7. Design a substantive audit program for property, plant, and equipment.

In verifying property, plant, and equipment, the auditor relies on verifying changes in the recorded balance, including an inspection of additions. The auditor rarely inspects assets making up the balance, reflecting the incidence of transactions that are frequent for inventories, being a current asset, but infrequent for property, plant, and equipment.

Accuracy and valuation is determined by the application of accounting procedures involving a high degree of judgement. For property, plant, and equipment, this involves estimating useful economic lives, residual value, and the basis of depreciation. The auditor needs to determine the appropriateness of the judgements made and the accuracy of the resulting calculations. The auditor also needs to ensure that the accounting basis adopted complies with applicable accounting standards and that required disclosures are properly made in the financial statements.

TRUE-FALSE STATEMENTS

1. The key issue in auditing inventories is to ensure the inventories actually exist, are owned,

and are properly valued.

Difficulty: Easy

Learning Objective: Identify the audit objectives applicable to inventories.

Section Reference: 12.1 Audit objectives: inventory

CPA Competency: Auditing and Assurance

AACSB: Analytic

2. Ensuring that inventory transactions are recorded in the correct accounts is an example of

the completeness assertion.

Difficulty: Easy

Learning Objective: Identify the audit objectives applicable to inventories.

Section Reference: 12.1 Audit objectives: inventory

CPA Competency: Auditing and Assurance

AACSB: Analytic

3. All companies are required by Canadian Auditing Standards to maintain a perpetual

inventory system.

Difficulty: Easy

Learning Objective: Describe the functions and control procedures normally found for the custody of inventory and maintenance of inventory records.

Section Reference: 12.2 Custody of inventory and maintenance of inventory records

CPA Competency: Auditing and Assurance

AACSB: Analytic

4. Perpetual inventory records need to be compared with actual inventory at regular

intervals.

Difficulty: Easy

Learning Objective: Describe the functions and control procedures normally found for the custody of inventory and maintenance of inventory records.

Section Reference: 12.2 Custody of inventory and maintenance of inventory records

CPA Competency: Auditing and Assurance

AACSB: Analytic

5. Specialized inventories may require the assistance of experts in determining either the

quantity (as in the case of aerial measurement of stockpiles) or value (as in the case of

antiques).

Difficulty: Easy

Learning Objective: Discuss considerations relevant to determining the audit strategy for inventories.

Section Reference: 12.3 Audit strategy: inventory

CPA Competency: Auditing and Assurance

AACSB: Analytic

6. Close to the end of the reporting period, the auditor needs to consider the extent of test

counts relative to total inventory and needs to review the recorded differences between test counts and inventory records over the year as well as the explanations of those differences.

Difficulty: Easy

Learning Objective: Discuss considerations relevant to determining the audit strategy for inventories.

Section Reference: 12.3 Audit strategy: inventory

CPA Competency: Auditing and Assurance

AACSB: Analytic

7. In tracing opening inventory balances to working papers for the previous year, the auditor

should make certain that any audit adjustments, agreed on in the previous year, were

recorded.

Difficulty: Easy

Learning Objective: Design a substantive audit program for inventory.

Section Reference: 12.4 Substantive procedures for inventories

CPA Competency: Auditing and Assurance

AACSB: Analytic

8. The application of analytical procedures to inventories is not used very extensively since

each company has its own inventory policies and procedures which make industry

comparison somewhat useless.

Difficulty: Easy

Learning Objective: Design a substantive audit program for inventory.

Section Reference: 12.4 Substantive procedures for inventories

CPA Competency: Auditing and Assurance

AACSB: Analytic

9. The key issues in auditing property, plant, and equipment are ensuring that the property,

plant, and equipment actually exist, are owned, and are properly valued with adequate

provision for depreciation.

Difficulty: Easy

Learning Objective: Identify the audit objectives applicable to property, plant, and equipment.

Section Reference: 12.5 Audit objectives: property, plant, and equipment

CPA Competency: Auditing and Assurance

AACSB: Analytic

10. Ensuring that additions and disposals of property, plant, and equipment before the period end are recorded in the current period and those after the period end are included in the next accounting period is an example of the classification assertion.

Difficulty: Easy

Learning Objective: Identify the audit objectives applicable to property, plant, and equipment.

Section Reference: 12.5 Audit objectives: property, plant, and equipment

CPA Competency: Auditing and Assurance

AACSB: Analytic

11. The transactions relating to property, plant, and equipment are quite often few and each usually material.

Difficulty: Easy

Learning Objective: Discuss considerations relevant to determining the audit strategy for property, plant, and equipment.

Section Reference: 12.6 Audit strategy

CPA Competency: Auditing and Assurance

AACSB: Analytic

12. A capital asset sub-ledger details individual items of plant and equipment and records

the cost of each asset and of any additions or alterations, and the accumulated depreciation

charged against it.

Difficulty: Easy

Learning Objective: Discuss considerations relevant to determining the audit strategy for property, plant, and equipment.

Section Reference: 12.6 Audit strategy

CPA Competency: Auditing and Assurance

AACSB: Analytic

13. With respect to property, plant, and equipment, in the first audit engagement, evidence

must be obtained as to the fairness of the opening balances and the ownership of the assets

making up the balances, whereas in a recurring engagement, the auditor concentrates on

the current year’s transactions.

Difficulty: Easy

Learning Objective: Design a substantive audit program for property, plant, and equipment.

Section Reference: 12.7 Designing substantive procedures for property, plant, and equipment

CPA Competency: Auditing and Assurance

AACSB: Analytic

14. As existence of property, plant, and equipment is the key audit assertion, the auditor

does not need to obtain evidence of sales, disposals, and trade-ins.

Difficulty: Easy

Learning Objective: Design a substantive audit program for property, plant, and equipment.

Section Reference: 12.7 Designing substantive procedures for property, plant, and equipment

CPA Competency: Auditing and Assurance

AACSB: Analytic

MULTIPLE CHOICE QUESTIONS

15. If the auditor was testing inventory pricing the audit objective being fulfilled would be

a) completeness.

b) rights and obligations.

c) existence.

d) accuracy, valuation, and allocation.

Difficulty: Easy

Learning Objective: Identify the audit objectives applicable to inventories.

Section Reference: 12.1 Audit objectives: inventory

CPA Competency: Auditing and Assurance

AACSB: Analytic

16. Reviewing data pertaining to inventory quality relates primarily to the

a) occurrence assertion.

b) completeness assertion.

c) rights and obligations assertion.

d) accuracy, valuation, and allocation assertion

Difficulty: Easy

Learning Objective: Identify the audit objectives applicable to inventories.

Section Reference: 12.1 Audit objectives: inventory

CPA Competency: Auditing and Assurance

AACSB: Analytic

17. Inventories received before the period end are recorded as current purchases and those received after the period end are included in the next period. What assertion is being described?

a) cut-off

b) checking

c) counting

d) preparation

Difficulty: Easy

Learning Objective: Identify the audit objectives applicable to inventories.

Section Reference: 12.1 Audit objectives: inventory

CPA Competency: Auditing and Assurance

AACSB: Analytic

18. Which of the following is not a function of maintaining inventory records?

a) physically comparing inventory with inventory records

b) recording the movement of goods into inventory

c) ordering goods

d) recording the movement of goods from inventory

Difficulty: Easy

Learning Objective: Describe the functions and control procedures normally found for the custody of inventory and maintenance of inventory records.

Section Reference: 12.2 Custody of inventory and maintenance of inventory records

CPA Competency: Auditing and Assurance

AACSB: Analytic

19. An important procedure for the conduct of a physical inventory count is to maintain control over the count systems. Which of the following is not a common count system?

a) use of pre-printed inventory count sheets

b) use of blank inventory tags

c) use of blank, pre-numbered inventory count sheets

d) use of pre-numbered, three-part inventory tags

Difficulty: Medium

Learning Objective: Describe the functions and control procedures normally found for the custody of inventory and maintenance of inventory records.

Section Reference: 12.2 Custody of inventory and maintenance of inventory records

CPA Competency: Auditing and Assurance

AACSB: Analytic

20. When costing manufactured inventory all of the following procedures are necessary except

a) determining the cost of materials entered into raw materials.

b) determining the cost of raw materials transferred to work in process.

c) recording costs of direct labour applied to work in process.

d) determine the cost of purchases.

Difficulty: Medium

Learning Objective: Describe the functions and control procedures normally found for the custody of inventory and maintenance of inventory records.

Section Reference: 12.2 Custody of inventory and maintenance of inventory records

CPA Competency: Auditing and Assurance

AACSB: Analytic

21. Cyclical inventory counts differ from full inventory counts in which way?

a) cyclical inventory counts are performed at the balance sheet date

b) cyclical inventory counts are only performed by internal audit

c) cyclical inventory counts may involve counting only a portion of inventory items

d) They differ in all of the above ways.

Difficulty: Easy

Learning Objective: Describe the functions and control procedures normally found for the custody of inventory and maintenance of inventory records.

Section Reference: 12.2 Custody of inventory and maintenance of inventory records

CPA Competency: Auditing and Assurance

AACSB: Analytic

22. ABC Ltd. is a retailer who is planning to undertake a full inventory count at year end. Control risk over inventory records for this entity is deemed to be

a) important due to the timing of the inventory count.

b) important due to the nature of the business.

c) unimportant due to the timing of the inventory count.

d) none of the above

Difficulty: Medium

Learning Objective: Describe the functions and control procedures normally found for the custody of inventory and maintenance of inventory records.

Section Reference: 12.2 Custody of inventory and maintenance of inventory records

CPA Competency: Auditing and Assurance

AACSB: Analytic

23. Which of these factors contributes least to the risk of misstatement of inventories?

a) the volume of transactions

b) location at a large single site

c) vulnerability to spoilage or damage

d) unusual items requiring geometric volume measurement.

Difficulty: Easy

Learning Objective: Discuss considerations relevant to determining the audit strategy for inventories.

Section Reference: 12.3 Audit strategy: inventory

CPA Competency: Auditing and Assurance

AACSB: Analytic

24. The audit strategy that would be the most appropriate when an auditor has decided on a predominantly substantive approach is to determine inventory quantity by

a) physical count at or within a few days of balance sheet date.

b) physical count near balance sheet date, adjusted by reference to perpetual records.

c) reference to perpetual records, without a physical count at or near balance sheet date.

d) none of the above

Difficulty: Medium

Learning Objective: Discuss considerations relevant to determining the audit strategy for inventories.

Section Reference: 12.3 Audit strategy: inventory

CPA Competency: Auditing and Assurance

AACSB: Analytic

25. Observation of inventory counts is a required audit procedure whenever

a) inventories are material.

b) it is practicable to do so.

c) inventories are material and it is practicable to do so.

d) inventories are material and the auditor considers it to be necessary.

Difficulty: Easy

Learning Objective: Discuss considerations relevant to determining the audit strategy for inventories.

Section Reference: 12.3 Audit strategy: inventory

CPA Competency: Auditing and Assurance

AACSB: Analytic

26. During the observation of the inventory count, the auditor has no responsibility to

a) watch for damaged and obsolete inventory items.

b) make some test counts of inventory quantities.

c) supervise the taking of the inventory.

d) record cut-off data.

Difficulty: Medium

Learning Objective: Discuss considerations relevant to determining the audit strategy for inventories.

Section Reference: 12.3 Audit strategy: inventory

CPA Competency: Auditing and Assurance

AACSB: Analytic

27. When the client engages an inventory specialist to take the inventory, the impact on the audit in this area is

a) to eliminate the need to perform test counts.

b) to eliminate the need to observe the inventory.

c) minimal because the specialists are considered independent auditors.

d) minimal because the specialists are considered audit employees.

Difficulty: Easy

Learning Objective: Discuss considerations relevant to determining the audit strategy for inventories.

Section Reference: 12.3 Audit strategy: inventory

CPA Competency: Auditing and Assurance

AACSB: Analytic

28. In companies where inventories are at multiple locations, the auditor’s observations ordinarily should include

a) all inventory locations.

b) a variation of locations attended each year.

c) a five minute visit to each location.

d) all significant inventory locations.

Difficulty: Easy

Learning Objective: Discuss considerations relevant to determining the audit strategy for inventories.

Section Reference: 12.3 Audit strategy: inventory

CPA Competency: Auditing and Assurance

AACSB: Analytic

29. The auditor’s strategy in performing test counts during the inventory observation is to

a) test all large-dollar items.

b) randomly select all test items.

c) concentrate tests on high dollar items with random selection of other items.

d) concentrate tests in areas where employees seem to be disregarding the inventory instructions.

Difficulty: Medium

Learning Objective: Discuss considerations relevant to determining the audit strategy for inventories.

Section Reference: 12.3 Audit strategy: inventory

CPA Competency: Auditing and Assurance

AACSB: Analytic

30. Confirmation of inventories in public warehouses cannot provide evidence concerning the

a) existence assertion.

b) completeness assertion.

c) accuracy, valuation, and allocation assertion.

d) it cannot provide evidence concerning any of the listed assertions.

Difficulty: Easy

Learning Objective: Design a substantive audit program for inventory.

Section Reference: 12.4 Substantive procedures for inventories

CPA Competency: Auditing and Assurance

AACSB: Analytic

31. Ensuring inventories include all materials, products, and supplies on hand at the end of the reporting period derives from the audit assertion of

a) completeness.

b) accuracy, valuation, and allocation.

c) existence.

d) rights and obligations.

Difficulty: Easy

Learning Objective: Design a substantive audit program for inventory.

Section Reference: 12.4 Substantive procedures for inventories

CPA Competency: Auditing and Assurance

AACSB: Analytic

32. The action that is not part of verifying the valuation of inventory is

a) observing the inventory count.

b) determining which items need to be written down in price.

c) checking the cost of inventory.

d) All of the above are part of verifying the value of inventory.

Difficulty: Medium

Learning Objective: Design a substantive audit program for inventory.

Section Reference: 12.4 Substantive procedures for inventories

CPA Competency: Auditing and Assurance

AACSB: Analytic

33. Which statement is most correct?

a) In observing physical inventory, the auditor has a responsibility to both take and supervise the taking of inventory.

b) In observing physical inventory, the auditor has no responsibility to take or supervise the taking of inventory.

c) In observing physical inventory, the auditor is only responsible for supervising the taking of inventory.

d) In observing physical inventory, the auditor is responsible for the taking of inventory.

Difficulty: Easy

Learning Objective: Design a substantive audit program for inventory.

Section Reference: 12.4 Substantive procedures for inventories

CPA Competency: Auditing and Assurance

AACSB: Analytic

34. The timing of a physical count of inventory is negotiated between the auditor and management. If the assessed level of control risk is high, an auditor would probably

a) insist that the entity performs physical counts of inventory several times during the year.

b) apply gross profit tests to ascertain the reasonableness of the physical counts.

c) increase the extent of tests of control of the inventory cycle.

d) request the entity to schedule the physical count at the end of the year.

Difficulty: Medium

Learning Objective: Design a substantive audit program for inventory.

Section Reference: 12.4 Substantive procedures for inventories

CPA Competency: Auditing and Assurance

AACSB: Analytic

35. In the event that the audit client has multiple locations and the auditor is not able to be present at all of them on the date of the physical inventory count, the auditor can rely

a) totally on the internal auditor to observe the physical inventory count.

b) on the internal auditor subject to the requirements of CAS 610.

c) totally on the records prepared as part of the client periodic inventory system.

d) none of the above

Difficulty: Medium

Learning Objective: Design a substantive audit program for inventory.

Section Reference: 12.4 Substantive procedures for inventories

CPA Competency: Auditing and Assurance

AACSB: Analytic

36. Verifying the accuracy and valuation assertion for inventory involves which of the following?

a) verifying the cost of inventory

b) verifying the net realizable value of inventory

c) verifying the basis used by management in determining the value of each item of inventory

d) all of the above

Difficulty: Easy

Learning Objective: Design a substantive audit program for inventory.

Section Reference: 12.4 Substantive procedures for inventories

CPA Competency: Auditing and Assurance

AACSB: Analytic

37. Which of these procedures would not be appropriate for an auditor in discharging his or her responsibilities concerning the entity’s physical inventories, assuming that the inventory is held at one location?

a) obtaining written representation from the entity as to the existence, quality, and dollar amount of the inventory

b) relying on the internal auditor to observe the total inventory count

c) confirming the goods in the hands of public warehouses

d) observing cut-off procedures are being performed

Difficulty: Medium

Learning Objective: Design a substantive audit program for inventory.

Section Reference: 12.4 Substantive procedures for inventories

CPA Competency: Auditing and Assurance

AACSB: Analytic

38. What should an auditor do to ensure that inventory is stated at the lower of cost and net realizable value?

a) select a sample of inventory purchases made during the year and check the associated invoice to ensure they are not recorded at more than that value

b) review and test the process used by management, use an independent estimate, and review subsequent events

c) ensure that all inventory items on hand at year end have been properly recorded at cost when purchased.

d) ensure that inventory that is not saleable is disclosed separately in the financial report

Difficulty: Medium

Learning Objective: Design a substantive audit program for inventory.

Section Reference: 12.4 Substantive procedures for inventories

CPA Competency: Auditing and Assurance

AACSB: Analytic

39. Which of these would not cause the net realizable value of inventory to be below its cost?

a) a rise in the selling price

b) physical deterioration

c) a decision to sell at a loss

d) obsolescence.

Difficulty: Easy

Learning Objective: Design a substantive audit program for inventory.

Section Reference: 12.4 Substantive procedures for inventories

CPA Competency: Auditing and Assurance

AACSB: Analytic

40. Goods held on consignment are

a) goods held at locations outside the entity.

b) goods held by the firm but belonging to customers.

c) goods sent to an entity by the seller where the seller is only paid when the goods are sold.

d) goods pledged as security for a loan.

Difficulty: Easy

Learning Objective: Design a substantive audit program for inventory.

Section Reference: 12.4 Substantive procedures for inventories

CPA Competency: Auditing and Assurance

AACSB: Analytic

41. The application of analytical procedures to the audit of inventories is often

a) not very useful.

b) the only procedure necessary.

c) a requirement of the standards.

d) used extensively.

Difficulty: Easy

Learning Objective: Design a substantive audit program for inventory.

Section Reference: 12.4 Substantive procedures for inventories

CPA Competency: Auditing and Assurance

AACSB: Analytic

42. Matters that should be considered by the auditor before reaching a conclusion about the reliability of an inventory count include all of the following except

a) the type of accounting package used by the firm.

b) the general condition of the inventory.

c) departures from the entity’s inventory count.

d) All of the above should be considered.

Difficulty: Easy

Learning Objective: Design a substantive audit program for inventory.

Section Reference: 12.4 Substantive procedures for inventories

CPA Competency: Auditing and Assurance

AACSB: Analytic

43. Which of the following is not an income statement account related to property, plant, and equipment?

a) depreciation

b) accumulated depreciation

c) loss on disposal of plant

d) rent on operating leases

Difficulty: Easy

Learning Objective: Identify the audit objectives applicable to property, plant, and equipment.

Section Reference: 12.5 Audit objectives: property, plant, and equipment

CPA Competency: Auditing and Assurance

AACSB: Analytic

44. The auditor identifies the specific audit objective: “determine that property, plant and equipment (PPE) assets represent productive assets that are in use at balance sheet date”.
This objective is derived from the

a) existence assertion.

b) completeness assertion.

c) presentation assertion.

d) rights and obligations assertion.

Difficulty: Easy

Learning Objective: Identify the audit objectives applicable to property, plant, and equipment.

Section Reference: 12.5 Audit objectives: property, plant, and equipment

CPA Competency: Auditing and Assurance

AACSB: Analytic

45. The statement about inherent risk assessments for property, plant, and equipment that is inaccurate is

a) inherent risk is normally low for the classification and presentation assertions for PPE assets acquired under finance leases.

b) inherent risk is normally low for the existence assertion in a merchandising entity because PPE assets are not generally vulnerable to theft.

c) inherent risk is normally moderate to high for the existence assertion in a manufacturing entity because scrapped or retired PPE assets may not be written off the books.

d) inherent risk is normally low for the accuracy, valuation, and allocation assertion when PPE assets are purchased for cash.

Difficulty: Easy

Learning Objective: Identify the audit objectives applicable to property, plant, and equipment.

Section Reference: 12.5 Audit objectives: property, plant, and equipment

CPA Competency: Auditing and Assurance

AACSB: Analytic

46. In the audit of property, plant, and equipment, the principal accuracy and valuation assertion is that

a) they should be stated at cost or a valuation less accumulated depreciation.

b) the entity has rights to all recorded property, plant, and equipment.

c) all additions that have occurred during the period have been recorded.

d) both a and c

Difficulty: Easy

Learning Objective: Identify the audit objectives applicable to property, plant, and equipment.

Section Reference: 12.5 Audit objectives: property, plant, and equipment

CPA Competency: Auditing and Assurance

AACSB: Analytic

47. The statement about audit strategy for property, plant, and equipment that is inaccurate is

a) for depreciation and accumulated depreciation inherent risk is affected by the difficulty in estimating both useful lives and residual value.

b) although material, verification of PPE typically involves significantly less time and cost than verification of current assets.

c) unlike current asset accounts, control risk assessments for PPE asset balances are less dependent on controls over major transaction classes.

d) None of the above statements is inaccurate.

Difficulty: Easy

Learning Objective: Identify the audit objectives applicable to property, plant, and equipment.

Section Reference: 12.5 Audit objectives: property, plant, and equipment

CPA Competency: Auditing and Assurance

AACSB: Analytic

48. Entities frequently maintain a capital asset register as a subsidiary ledger detailing individual items of PPE. Which of the following would an auditor not expect to find in a capital asset register?

a) cost and accumulated depreciation

b) the date of previous audit inspections

c) serial number and supplier

d) insurance cover

Difficulty: Easy

Learning Objective: Discuss considerations relevant to determining the audit strategy for property, plant, and equipment.

Section Reference: 12.6 Audit strategy

CPA Competency: Auditing and Assurance

AACSB: Analytic

49. When equipment items are purchased for cash

a) the inherent risk in the accuracy, valuation, and allocation assertions are not affected.

b) the inherent risk in the existence and occurrence and allocation assertions is high.

c) the inherent risk in the accuracy, valuation, and allocation assertions objectivity is low.

d) the inherent risk in the accuracy, valuation, and allocation assertions is zero.

Difficulty: Easy

Learning Objective: Discuss considerations relevant to determining the audit strategy for property, plant, and equipment.

Section Reference: 12.6 Audit strategy

CPA Competency: Auditing and Assurance

AACSB: Analytic

50. In auditing property, plant, and equipment (PPE), why might the auditor decide to assess control risk at the maximum and perform predominantly substantive testing?

a) The number of additions to/disposals of PPE is usually not a material number. Therefore, it is not of concern to the auditor.

b) PPE in total is material. All material balances should be tested using a substantive approach.

c) The controls over PPE for most companies are usually poor.

d) Because transactions relating to property, plant, and equipment are few and usually individually material, assessment of control risk relating to these transactions is usually assumed to be the maximum.

Difficulty: Medium

Learning Objective: Discuss considerations relevant to determining the audit strategy for property, plant, and equipment.

Section Reference: 12.6 Audit strategy

CPA Competency: Auditing and Assurance

AACSB: Analytic

51. Which of these is not true regarding substantive procedures for property, plant, and equipment in an initial audit

a) the auditor concentrates on the current year’s transactions only.

b) evidence must be obtained as to the fairness of the opening balances.

c) evidence must be obtained as to the ownership of the assets.

d) All of the above are untrue.

Difficulty: Easy

Learning Objective: Design a substantive audit program for property, plant, and equipment.

Section Reference: 12.7 Designing substantive procedures for property, plant, and equipment

CPA Competency: Auditing and Assurance

AACSB: Analytic

52. When the auditor receives the client-prepared schedules for property, plant, and equipment assets, in order to determine that they booked the adjustments proposed by the auditor at the conclusion of the prior audit, the auditor should

a) inquire of management.

b) examine the general journal for the first month of the current year.

c) inquire of accounting personnel.

d) compare beginning balances with prior year's working papers.

Difficulty: Medium

Learning Objective: Design a substantive audit program for property, plant, and equipment.

Section Reference: 12.7 Designing substantive procedures for property, plant, and equipment

CPA Competency: Auditing and Assurance

AACSB: Analytic

53. Analytical procedures are not widely used in the audit of property, plant, and equipment. Which of the following is not a valid comment about the use of analytical procedures in the audit of PPE?

a) compare the annual depreciation charge with the cost of an asset to approximate the depreciation rate

b) a substantial asset balance variation can be caused by one or a few transactions of which the auditor is likely to already be aware

c) comparison of repairs expense with prior years may indicate capitalization in error

d) None of the above is invalid.

Difficulty: Medium

Learning Objective: Design a substantive audit program for property, plant, and equipment.

Section Reference: 12.7 Designing substantive procedures for property, plant, and equipment

CPA Competency: Auditing and Assurance

AACSB: Analytic

54. When substantiating disposals of property, plant, and equipment, the auditor should be able to find evidence using all of the following except

a) cash remittance advices.

b) written authorizations.

c) supplier invoices.

d) sales agreements.

Difficulty: Easy

Learning Objective: Design a substantive audit program for property, plant, and equipment.

Section Reference: 12.7 Designing substantive procedures for property, plant, and equipment

CPA Competency: Auditing and Assurance

AACSB: Analytic

55. The auditor is least likely to discover unrecorded retirements of property, plant, and equipment assets by

a) analyzing the miscellaneous revenue account.

b) investigating the disposition of facilities associated with discontinued product lines.

c) selecting retirement work orders from the accounting records and verifying their accuracy.

d) reviewing insurance policies for termination or reductions of coverage.

Difficulty: Medium

Learning Objective: Design a substantive audit program for property, plant, and equipment.

Section Reference: 12.7 Designing substantive procedures for property, plant, and equipment

CPA Competency: Auditing and Assurance

AACSB: Analytic

56. Substantiating asset disposals with supporting documentation is a test of details of transactions. Which assertion is most likely satisfied?

a) existence

b) completeness

c) accuracy, valuation, and allocation

d) all of the above

Difficulty: Easy

Learning Objective: Design a substantive audit program for property, plant, and equipment.

Section Reference: 12.7 Designing substantive procedures for property, plant, and equipment

CPA Competency: Auditing and Assurance

AACSB: Analytic

57. The auditor is concerned that the client has committed a number of errors in the capital/repair expenditures distinction. In selecting items from the repairs expense account for investigation, the most appropriate audit procedure would involve

a) random selection.

b) systematic selection.

c) tracing.

d) scanning.

Difficulty: Easy

Learning Objective: Design a substantive audit program for property, plant, and equipment.

Section Reference: 12.7 Designing substantive procedures for property, plant, and equipment

CPA Competency: Auditing and Assurance

AACSB: Analytic

58. In a typical audit, verification of the ownership of plant and equipment is least likely to involve examination of

a) the physical characteristics of the items.

b) “paid invoices”.

c) registration certificates.

d) property tax bills.

Difficulty: Easy

Learning Objective: Design a substantive audit program for property, plant, and equipment.

Section Reference: 12.7 Designing substantive procedures for property, plant, and equipment

CPA Competency: Auditing and Assurance

AACSB: Analytic

59. When reviewing accumulated depreciation, the auditor seeks evidence as to the reasonableness, consistency, and accuracy of depreciation charges. The substantive procedures performed seek to provide evidence for which assertion?

a) accuracy and valuation

b) completeness

c) rights and obligations

d) presentation

Difficulty: Easy

Learning Objective: Design a substantive audit program for property, plant, and equipment.

Section Reference: 12.7 Designing substantive procedures for property, plant, and equipment

CPA Competency: Auditing and Assurance

AACSB: Analytic

60. When an asset is shown on the financial statements other than at cost, which of the following is not required to be disclosed?

a) the evidence gathered to support the valuation

b) the year and basis of valuation

c) whether it is an internal or independent valuation

d) the name of the valuer

Difficulty: Easy

Learning Objective: Design a substantive audit program for property, plant, and equipment.

Section Reference: 12.7 Designing substantive procedures for property, plant, and equipment

CPA Competency: Auditing and Assurance

AACSB: Analytic

61. Evidence concerning the pledging of property, plant, and equipment assets is likely to be obtained through

a) review of the board minutes.

b) confirmation of debt agreements.

c) inquiries of management.

d) all of the above

Difficulty: Easy

Learning Objective: Design a substantive audit program for property, plant, and equipment.

Section Reference: 12.7 Designing substantive procedures for property, plant, and equipment

CPA Competency: Auditing and Assurance

AACSB: Analytic

SHORT ANSWER QUESTIONS

62. Identify the appropriate account balance audit objectives applicable to inventories for the assertion categories of:

• existence
• completeness
• rights and obligations
• accuracy, valuation, and allocation
• presentation.

Difficulty: Medium

Learning Objective: Identify the audit objectives applicable to inventories.

Section Reference: 12.1 Audit objectives: inventory

CPA Competency: Auditing and Assurance

AACSB: Analytic

63. Identify the assertion relating to classes of transactions that corresponds with the following descriptions.

1. Inventory transactions are recorded in the correct accounts.
2. Recorded sale transactions represent inventories sold during the period.
3. All inventory receipts during the period have been recorded as purchases.
4. Inventory transactions are accurately recorded.
5. Inventories received before the period end are recorded as purchases in the current period and those received after the period end are included in the next accounting period.
6. Purchase and inventory transactions and events are appropriately aggregated and disaggregated, clearly described, and the related disclosures are relevant and understandable.

Difficulty: Medium

Learning Objective: Identify the audit objectives applicable to inventories

Section Reference: 12.1 Audit objectives

CPA Competency: Auditing and Assurance

AACSB: Analytic

64. Identify the assertion relating to account balances that corresponds with the following descriptions.

1. Inventories recorded represent items on hand at the end of the reporting period.
2. The entity has rights to the inventories included in the balance sheet.
3. Inventories include all materials, products, and supplies on hand at the end of the reporting period.
4. Inventories are properly identified and classified in the financial statements.
5. All inventory disclosures that should have been included in the financial statements have been included.
6. Inventories are appropriately aggregated or disaggregated, clearly described, and the related disclosures are relevant and understandable.

Difficulty: Medium

Learning Objective: Identify the audit objectives applicable to inventories

Section Reference: 12.1 Audit objectives

CPA Competency: Auditing and Assurance

AACSB: Analytic

65. List the procedures that should be adopted in a physical inventory count.

Difficulty: Medium

Learning Objective: Describe the functions and control procedures normally found for the custody of inventory and maintenance of inventory records.

Section Reference: 12.2 Custody of inventory and maintenance of inventory records

CPA Competency: Auditing and Assurance

AACSB: Analytic

66. List the four separate functions of maintaining inventory records.

Identify the documentation used in each function to prevent inventory records from being manipulated.

Difficulty: Medium

Learning Objective: Describe the functions and control procedures normally found for the custody of inventory and maintenance of inventory records.

Section Reference: 12.2 Custody of inventory and maintenance of inventory records

CPA Competency: Auditing and Assurance

AACSB: Analytic

67. Describe a substantive procedure relating to observing a physical inventory count.

Difficulty: Medium

Learning Objective: Describe the functions and control procedures normally found for the custody of inventory and maintenance of inventory records

Section Reference: 12.2 Custody of Inventory and Maintenance of Inventory Records

CPA Competency: Auditing and Assurance

AACSB: Analytic

68. What are the three audit strategy options that an auditor has for verifying the existence (and completeness) of inventories and what is the implication of each strategy for control risk?

Difficulty: Medium

Learning Objective: Discuss considerations relevant to determining the audit strategy for inventories.

Section Reference: 12.3 Audit strategy: inventory

CPA Competency: Auditing and Assurance

AACSB: Analytic

69. For each of the following potential misstatements for inventories, identify a necessary control:

1. Failure to record goods received
2. Unreliable count procedures during a physical inventory count
3. Inappropriate basis for determining inventory costs
4. Unauthorized removal of goods from inventory
5. Insufficient extent of comparison between physical inventory count and inventory records
6. Inadequate investigation and correction of differences between inventory count and inventory records

Difficulty: Medium

Learning Objective: Discuss considerations relevant to determining the audit strategy for inventories.

Section Reference: 12.3 Audit strategy: inventory

CPA Competency: Auditing and Assurance

AACSB: Analytic

70. Describe a preventative control for each of the WCGW (what can go wrong) provided in the table below.

Difficulty: Medium

Learning Objective: Discuss considerations relevant to determining the audit strategy for inventory.

Section Reference: 12.3 Audit strategy: inventory

CPA Competency: Auditing and Assurance

AACSB: Analytic

71. There are numerous factors that contribute to the risk of misstatement in the assertions for inventories and cost of sales. List four of these factors.

Difficulty: Medium

Learning Objective: Design a substantive audit program for inventory.

Section Reference: 12.4 Substantive procedures for inventories

CPA Competency: Auditing and Assurance

AACSB: Analytic

72. From the list of substantive procedures provided below, classify each as either a procedure relating to inventory or a procedure relating to property, plant, and equipment.

List of substantive procedures:

1. Trace opening balances for plant assets and related accumulated depreciation accounts to and from the previous year’s working papers.
2. Review activity in the general ledger, accumulated depreciation, and depreciation expense accounts, and investigate entries that appear unusual in amount or source.
3. Compare asset additions and disposals with supporting documentation.
4. Review depreciation expense.
5. Trace opening inventory balances to the previous year’s working papers.
6. Test the cut-off of purchases, inventory transfers, and sales.
7. Review activity in inventory accounts and investigate entries that appear unusual in amount or source.
8. Look for indications of slow-moving, damaged, or obsolete inventory.

Difficulty: Medium

Learning Objective: Design a substantive audit program for inventory

Learning Objective: Design a substantive audit program for property, plant, and equipment

Section Reference: 12.4 Substantive procedures for inventories

Section Reference: 12.7 Designing substantive procedures for property, plant, and equipment

CPA Competency: Auditing and Assurance

AACSB: Analytic

73. Identify the assertion relating to classes of transactions that corresponds with the following descriptions.

1. Recorded additions represent property, plant, and equipment acquired during the period under audit.
2. All additions that occurred during the period have been recorded.
3. Additions are correctly journalized and posted.
4. Additions and disposals of property, plant, and equipment before the period end are recorded in the current period and those after the period end are included in the next accounting period.
5. Recorded disposals represent property, plant, and equipment sold or scrapped during the period under audit.
6. Additions and disposals of property, plant, and equipment are recorded in the correct accounts.
7. Property, plant, and equipment transactions and events are appropriately aggregated or disaggregated, clearly described, and the related disclosures are relevant and understandable.
8. Disclosed property, plant, and equipment transactions have occurred and pertain to the entity.
9. Property, plant, and equipment transactions are disclosed accurately and at appropriate amounts.
10. All disposals that occurred during the period have been recorded.

Difficulty: Medium

Learning Objective: Identify the audit objectives applicable to property, plant and equipment

Section Reference: 12.5 Audit objectives: property, plant and equipment

CPA Competency: Auditing and Assurance

AACSB: Analytic

74. Identify the assertion relating to account balances that corresponds with the following descriptions.

1. Property, plant, and equipment are stated at cost or a valuation less accumulated depreciation.
2. Non-current asset balances include all applicable assets used in operations at the end of the reporting period.
3. The entity owns or has rights to all recorded property, plant, and equipment assets at the end of the reporting period.
4. Recorded property, plant, and equipment assets represent productive assets that are in use at the end of the reporting period.
5. The details of additions and disposals of property, plant, and equipment support their classification in the financial statements.
6. Property, plant, and equipment are appropriately aggregated and disaggregated, clearly described, and the related disclosures are relevant and understandable.

Difficulty: Medium

Learning Objective: Identify the audit objectives applicable to property, plant and equipment

Section Reference: 12.5 Audit objectives: property, plant and equipment

CPA Competency: Auditing and Assurance

AACSB: Analytic

75.

1. Generally, what is the assessment of control risk for transactions relating to property, plant, and equipment?
2. Generally, what is the assessment of materiality in relation to property, plant, and equipment?
3. Briefly discuss the assessment of inherent risk in relation to property, plant, and equipment.

Difficulty: Medium

Learning Objective: Discuss considerations relevant to determining the audit strategy for property, plant, and equipment.

Section Reference: 12.6 Audit strategy

CPA Competency: Auditing and Assurance

AACSB: Analytic

76.

1. What procedures might be useful to the auditor in determining if all disposals of property, plant, and equipment have been recorded?
2. What procedures would be adopted by the auditor to gather evidence on the reasonableness, consistency, and accuracy of depreciation charges (expense)?

Difficulty: Medium

Learning Objective: Design a substantive audit program for property, plant, and equipment.

Section Reference: 12.7 Designing substantive procedures for property, plant, and equipment

CPA Competency: Auditing and Assurance

AACSB: Analytic

77. When performing tests of details of balances for property, plant, and equipment, it is necessary for the auditor to review accumulated depreciation. Discuss what this review entails.

Difficulty: Medium

Learning Objective: Design a substantive audit program for property, plant, and equipment.

Section Reference: 12.7 Designing substantive procedures for property, plant, and equipment

CPA Competency: Auditing and Assurance

AACSB: Analytic

78. When conducting tests of details of transactions for property, plant, and equipment, there are three types of transactions that need to be substantiated. These transactions are additions, disposals, and repairs and maintenance. Briefly describe what is involved with substantiating each of these types of transactions.

Difficulty: Medium

Learning Objective: Design a substantive audit program for property, plant, and equipment.

Section Reference: 12.7 Designing substantive procedures for property, plant, and equipment

CPA Competency: Auditing and Assurance

AACSB: Analytic

ESSAY QUESTIONS

79. Describe the audit process for inventory transactions, indicating the audit risks that need to addressed and the mitigating controls that can be implemented.

Difficulty: Medium

Learning Objective: Discuss considerations relevant to determining the audit strategy for inventories.

Section Reference: 12.3 Audit strategy: inventory

CPA Competency: Auditing and Assurance

AACSB: Analytic

80. Describe the audit process for property, plant, and equipment transactions, indicating the audit risks that need to addressed and the mitigating controls that can be implemented.

Difficulty: Medium

Learning Objective: Discuss considerations relevant to determining the audit strategy for property, plant, and equipment.

Section Reference: 12.6 Audit strategy

CPA Competency: Auditing and Assurance

AACSB: Analytic

LEGAL NOTICE

Copyright © 2021 by John Wiley & Sons Canada, Ltd. or related companies. All rights reserved.

The data contained in these files are protected by copyright. This manual is furnished under license and may be used only in accordance with the terms of such license.

The material provided herein may not be downloaded, reproduced, stored in a retrieval system, modified, made available on a network, used to create derivative works, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise without the prior written permission of John Wiley & Sons Canada, Ltd.