Seatwork No.

1
Audit of Property Plan and Equipment

True or False

T 1. The auditors' approach to the audit of property, plant and equipment largely results from the fact
that relatively few transactions occur.
F 2. A major control procedure related to plant and equipment is a budget for depreciation.
T 3. Evidence of continued ownership of property is obtained by vouching payments to a mortgage
trustee.
F 4. The auditors typically observe all major items of property, plant and equipment every year.
T 5. Material purchases of assets from an affiliated company should be disclosed in the financial
statements.
F 6. Idle equipment will generally need to be reclassified as a current asset.
F 7. The primary purpose of internal control over plant and equipment is to safeguard the assets from
theft.
F 8. A typical procedure in the audit of property is examination of public records to verify the
ownership of the property.
T 9. Even when internal control is weak, a significant portion of the audit work on property, plant and
equipment may be performed at an interim date.
T 10. In the audit of depletion the auditors must often rely on the work of specialists.

Multiple Choice Questions

11. An auditor has identified numerous debits to accumulated depreciation of equipment. Which of the
following is most likely?
A. The estimated remaining useful lives of equipment were increased.
B. Plant assets were retired during the year.
C. The prior year's depreciation expense was erroneously understated.
D. Overhead allocations were revised at year-end.

12. In testing for unrecorded retirements of equipment, an auditor might.

A. Select items of equipment from the accounting records and then attempt to locate them during the
plant tour.
B. Compare depreciation expense with the prior year's depreciation expense.
C. Trace equipment items observed during the plant tour to the equipment subsidiary ledger.
D. Scan the general journal for unusual equipment retirements.

13. A plant manager would be most likely to provide information on which of the following?
A. Adequacy of the provision for uncollectible accounts.
B. Appropriateness of physical inventory valuation techniques.
C. Existence of obsolete inventory.
D. Deferral of certain purchases of office supplies.

14. Which of the following would be least likely to address control over the initiation and execution of
equipment transactions?
A. Requests for major repairs are approved by a higher level than the department initiating the
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Audit of Property Plan and Equipment

request.
B. Prenumbered purchase orders are used for equipment and periodically accounted for.
C. Requests for purchases of equipment are reviewed for consideration of soliciting competitive bids.
D. Procedures exist to restrict access to equipment.

15. When there are numerous property and equipment transactions during the year, an auditor who
plans to assess control risk at a low level usually performs:
A. Tests of controls and extensive tests of property and equipment balances at the end of the year.
B. Analytical procedures for current year property and equipment transactions.
C. Tests of controls and limited tests of current year property and equipment transactions.
D. Analytical procedures for property and equipment balances at the end of the year.

16. Which of the following best describes the auditors' approach to the audit of the ending balance of
property, plant and equipment for a continuing non-public client?
A. Direct audit of the ending balance.
B. Agreement of the beginning balance to prior year's working papers and audit of significant changes
in the accounts.
C. Audit of changes in the accounts since inception of the company.
D. Audit of selected purchases and retirements for the last few years.

17. Which of the following is not a control that should be established for purchases of equipment?
A. Establishing a budget for capital acquisitions.
B. Requiring that the department in need of the equipment order the equipment.
C. Requiring that the receiving department receive the equipment.
D. Establishing an accounting policy regarding the minimum dollar amount of purchase that will be
considered for capitalization.

18. Which of the following is not one of the auditors' objectives in auditing depreciation?
A. Establishing the reasonableness of the client's replacement policy.
B. Establishing that the methods used are appropriate.
C. Establishing that the methods are consistently applied.
D. Establishing the reasonableness of depreciation computations.

19. Which of the following is the best evidence of continuous ownership of property?
A. Examination of the deed.
B. Examination of rent receipts from lessees of the property.
C. Examination of the title policy.
D. Examination of canceled check in payment for the property.

20. Which of the following best describes the auditors' typical observation of plant and equipment?
A. The auditors observe a physical inventory of plant and equipment, annually.
B. The auditors observe all additions to plant and equipment made during the year.
C. The auditors observe all major plant and equipment items in the clients' accounts each year.
D. The auditors observe major additions to plant and equipment made during the year.
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Audit of Property Plan and Equipment

21. Which of the following is used to obtain evidence that the client's equipment accounts are not
understated?
A. Analyzing repairs and maintenance expense accounts.
B. Vouching purchases of plant and equipment.
C. Recomputing depreciation expense.
D. Analyzing the miscellaneous revenue account.

22. Which of the following is not a test primarily used to test property, plant and equipment accounts
for overstatement?
A. Investigation of reductions in insurance coverage.
B. Review of property tax bills.
C. Examination of retirement work orders prepared during the year.
D. Vouching retirements of plant and equipment.

23. A continuing audit client's property, plant and equipment and accounts receivable accounts have
approximately the same year-end balance. In this circumstance, when compared to property, plant and
equipment one would normally expect the audit of accounts receivable to require:
A. More audit time.
B. Less audit time.
C. Approximately the same amount of audit time.
D. Similar confirmation procedures.

24. When comparing an initial audit with a subsequent year audit for a particular client, the scope of
audit procedures for which of the following accounts would be expected to decrease the most?
A. Accounts receivable.
B. Cash.
C. Marketable securities.
D. Property, plant and equipment.

25. When performing an audit of the property, plant and equipment accounts, an auditor should
expect which of the following to be most likely to indicate a departure from generally accepted
accounting principles?
A. Repairs have been capitalized to repair equipment that had broken down.
B. Interest has been capitalized for self-constructed assets.
C. Assets have been acquired from affiliated corporations with the related transactions recorded and
described in the financial statements.
D. The cost of freight-in on an acquisition has been capitalized.