Review Questions Chapter 13:
1. The auditors’ verification of plant and equipment is facilitated by several factors not
applicable to audit work on current assets. What are these factors?
High dollar amount of individual items.
Usually little change in property accounts year to year. Land, buildings, and
equipment often remain unchanged for many years; hence there is little
accounting activity to verify.
Minor effect on net income from cutoff errors.
2. K-J Corporation has current assets of $5 million and approximately the same amount
of plant and equipment. Should the two groups of assets require about the same
amount of audit time? Give reasons.
No it shouldn't for the same reason as above.
3. What are the objectives of establishing internal control over plant and equipment?
To obtain maximum efficiency from the amounts expended for the assets
Safeguarding the assets
Maintaining accurate records of property, plant, and equipment
Assuring that acquisitions and retirements are properly authorized.
4. Identify at least three elements of strong internal control over property, plant, and
equipment.
A budget to forecast and control acquisitions and retirements of plant assets.
A subsidiary ledger consisting of a separate record for each unit of property.
A system of authorization requiring advance executive approval of all plant
and equipment acquisitions.
A reporting procedure assuring prompt disclosure and analysis of variances
A system of retirement procedures, including retirement work orders.
5. Explain the use of a system of authorizations for additions to plant and equipment.
A "system of authorizations" for property and equipment additions is a plan
requiring written executive approval in advance for all acquisitions of plant
assets, whether by purchase, lease, or construction. Serially numbered capital
work orders may be used to record authorizations.
6. Moultrie Company discovered recently that a number of its property and equipment
assets had been retired from use several years ago without any entries being made in
the accounting records. The company asks you to suggest procedures that will prevent
unrecorded retirement of assets.
Company policy should provide for a plant ledger, identification tags on all
plant assets, and a system of retirement work orders. Factory supervisors
should be informed that no item of equipment should be retired from use
without prior executive approval on a serially numbered retirement work
order. Copies of these work orders should be routed to the accounting
department
7. Does a failure to record the retirement of machinery affect net income? Explain.
Yes. Failure to record the retirement of machinery can affect net income. The
machines will continue to be depreciated if not already fully depreciated, and
any loss on the retirement will be omitted from the income statement.
8. The auditors’ verification of current assets such as cash, securities, and inventories
emphasizes observation, inspection, and confirmation to determine the physical
existence of these assets. Should the auditors take a similar approach to establish the
existence of the recorded plant assets? Explain fully.
Yes the auditors should take a similar approach. This may be performed in two
ways. By tracing items in the plant ledger to the physical assets, the auditors
prove that the asset shown in the accounting records actually exist and are in
current use. The alternative testing procedures is to inspect selected assets in
the plant and trace these assets to the detailed records. This test provides
evidence that existing assets are recorded (completeness).
