S11 - Investing Cycle ch14

Question 1

What is different between other assets such as prepaid expense, and assets like A/R or inventory?

Answer 1

Prepaid expense is usually not material, meaning the inherent risk associated with prepaid expenses is generally assessed as low because the accounts do not involve any complex or contentious accounting issues.

Question 2

What is the implication of the following statement:

Prepaid expenses are normally processed through the purchasing process

Answer 2

Control procedures in PURCHASING should ensure that each item is properly authorized and recorded

Question 3

When are tests of details on prepaid insurance balance necessary?

Answer 3

Only when misstatements are expected.

Otherwise, substantive tests of transactions are conducted in the testing of the purchasing process (that is if they are conducted at all)

Question 4

What are 2 examples of tests of details of the prepaid insurance account for existence and completeness?

Answer 4

Confirm policy with insurance broker,

Examine supporting source
documents (insurance bill and policies)

Question 5

What is an example of tests of details of the prepaid insurance account for rights and obligations?

Answer 5

Confirm policy beneficiary with insurance broker

Question 6

What is an example of tests of details of the prepaid insurance account for valuation?

Answer 6

Determine unexpired portion of policy and insurance expense.

Question 7

What is an example of tests of details of the prepaid insurance account for classification?

Answer 7

Determine the propriety of distribution between manufacturing overhead and SG&A expense

Question 8

What are some examples (6) of intangible assets items?

Answer 8

1. Marketing
2. Customer
3. Artistic
4. Contract
5. Technology
6. Goodwill

Question 9

What is the level of risk assessment regarding intangible assets?

Answer 9

With the judgment and complexity associated with valuation and estimation of intangible assets, the auditor would likely assess the inherent risk as HIGH.

worth noting that the quantitative assessment is not necessary unless a qualitative assessment indicates that an asset is more likely than not impaired

Assets with finite and indefinite useful lives have different treatments (IAS38)

Question 10

What are the 5 assertions are normally considered for tests of details of intangible assets?

Answer 10

Existence
Completeness
Valuation
Rights and obligations
Classification

Question 11

Why are tests of details required for intangible assets?

Answer 11

Because substantive analytical procedures are generally not sufficient

Question 12

For the property management process, what is the difference between a recurring and a new engagement?

Answer 12

In a recurring engagement, the auditor is able to focuson additions and retirementsin the current period becauseamounts from prior periods havebeen subject to audit procedures.

In a new engagement, the auditor has to verify the assets that make up the beginning balance in PP&E

Question 13

What are the 3 inherent risk factors in the property management process?

Answer 13

1. Complex accounting issues
2. Difficult-to-audit transactions
3. Misstatements detected in prior audits

Question 14

What are some of the complex accounting issues related to the property management process? (3)

Answer 14

Lease accounting

Self-constructed assets

Interest capitalization

Question 15

What are some of the difficult-to-audit transactions related to the property management process (3)

Answer 15

Donated assets

Self-constructed assets

Non-monetary exchanges

Question 16

Tests of control
Occurence and authorization

What should companies have to approve the capital assets transactions?

Answer 16

Have an authorization table

Question 17

Tests of control
Completeness

What information is usually on the PP&E subsidiary ledger for each capital asset? (3)

Answer 17

1. Description, location, and ID number
2. Date of acquisition and installed cost
3. Depreciation methods for book and tax purposes, salvage value, and estimated useful life

Question 18

Tests of control
Completeness

What is an example of a procedure that can be done to ensure that the completeness assertion is met?

Answer 18

Periodic reconciliation of the PP&E subsidiary ledger to the general ledger control accounts

Question 19

When are substantive procedures done for auditing PP&E?

Answer 19

When the number of transactions is small.

Question 20

What are 5 substantive analytical procedures can be used in the audit or PP&E?

Answer 20

1. Comparison of prior year balances in PPE and dep’n expense, with current-period balances
2. Compute ratio of dep’n expense to related PPE, and compare with prior year’s ratio
3. Compute ratio of repairs and maintenance expense to related PPE, and compare with prior year’s ratio
4. Compute ratio of insurance expense to related PPE, and compare with prior year’s ratio
5. Review capital budget and compare the amount spent with amounts budgeted.

Question 21

Example of Substantive Tests of Transactions and Account Balances for PPE

2 examples for the occurence assertion

Answer 21

1. Vouch significant additions and dispositions to vendor invoices or other supporting documentation
2. Review lease agreements to ensure that lease transactions are accounted for properly

Question 22

Example of Substantive Tests of Transactions and Account Balances for PPE

4 examples for the completeness assertion

Answer 22

1. Trace a sample of purchase requisitions to loading dock reports and to the PPE records
2. Obtain a lead schedule of PPE; foot schedule and agree totals to the general ledger
3. Obtain detailed schedules for additions and dispositions of PPE; foot schedule; agree amounts to totals shown on lead schedule
4. Physically examine a sample of capital assets and trace them into PPE subsidiary ledger

Question 23

Example of Substantive Tests of Transactions and Account Balances for PPE

1 example for the authorization assertion

Answer 23

Vouch a sample of PPE additions to documentation indicating proper authorization

Question 24

Example of Substantive Tests of Transactions and Account Balances for PPE

1 examples for the cutoff assertion

Answer 24

Examine the purchases and sales of capital assets for a few days before and after year-end

(vendor’s invoice)

Question 25

Example of Substantive Tests of Transactions and Account Balances for PPE 2 examples for the Classification assertion

Answer 25

1. Vouch transactions included in repairs and maintenance for items that should be capitalized 2. Review lease transactions for proper treatments As for the classification of a newly purchased asset in PPE, it is usually examined in the testing of the purchasing process

Question 26

Example of Substantive Tests of Transactions and Account Balances for PPE 1 example for the Existence assertion

Answer 26

Verify the existence of major additions by physically inspecting the capital asset

Question 27

Example of Substantive Tests of Transactions and Account Balances for PPE 1 example for the rights and obligations assertion

Answer 27

Examine or confirm deeds or title documents for proof of ownership (vendor's invoice, other supporting documents)

Question 28

Example of Substantive Tests of Transactions and Account Balances for PPE 3 example for the accuracy, valuation, and allocation assertion

Answer 28

1. Evaluate fixed assets for significant write-offs or impairments by performing procedures such as - Identify event indicating that the carrying value might not be recoverable - Verify impairment loss by determining the sum of expected future CFs and comparing it to the carrying value - Examine the entity's documentation supporting impairment of write-off 2. For written-off assets, test amounts charged against income and acc. dep'n 3. Test depreciation for a sample of capital assets

Question 29

Example of Substantive Tests of Transactions and Account Balances for PPE 1 example for the presentation assertion

Answer 29

Review the disclosure checklist and the related disclosures for relevance and completeness

Question 30

What are some examples of disclosure items for PPE? (7)

Answer 30

1. Classes of capital assets and valuation bases 2. Dep'n methods and useful lives (financial reporting and tax purposes) 3. Non-operating assets 4. Construction or purchase commitments 5. Liens and mortgages 6. Acquisition or disposal of major operating facilities 7. Direct financing or other lease arrangements