HMWK 12

An auditor’s review of the repair expense to identify any capital expenditures is a test related to which
management assertion?
a. Completion.
b. Rights and obligations.
c. Existence.
d. Valuation.
Which of the following procedures is a substantive procedure that relates to the rights and obligations
assertion?
a. Inquire of management about assets that are idle.
b. Assess management’s impairment estimates.
c. Recalculate amortization expense.
d. Examine documents of title.
In a tour of a client's manufacturing facility, the auditor is most likely attempting to satisfy which of the
following management assertions related to long-lived assets?
a. Existence.
b. Completeness.
c. Presentation and disclosure.
d. Rights.
Which of the following is not a technique that auditors can use when performing planning analytical
procedures related to long-lived assets?
a. Perform an overall estimate of depreciation expense.
b. Review and analyze gains/losses on disposals of equipment.
c. Compare depreciable lives used by the client for various asset categories with those of the
industry.
d. All the above are techniques that auditors can use.
Which of the following procedures is not a procedure used by an auditor in searching for unrecorded
disposals of long-lived assets?
a. Examine scrap sales accounts.
b. Send confirmations to insurance agents.
c. Examine property tax records.
d. Make client inquiries.
Which of the following is not a typical internal control over long-lived assets?
a. Periodically reassess the appropriateness of depletion categories.
b. Identify obsolete or scrapped equipment and write it down to scrap value.
c. Reconcile physical asset inventory with the property ledger.
d. Periodically review management strategy and systematically assess the impairment of assets.
Reconciling the physical asset inventory with the property ledger on a periodic basis is a control related
to which management assertion?
a. Valuation.
b. Completeness.
c. Rights and obligations.
d. Existence.
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If the auditor is testing the reasonableness of depreciation expense for the year, which assertion is being
tested?
a. Completeness.
b. Valuation.
c. Rights and obligations.
d. Existence.
Which of the following is not a substantive audit procedure for leases?

a. Review the client’s disclosure of lease obligations for compliance with GAAP.
b. Obtain and read copies of lease agreements and develop a schedule of leases.
c. For all operating leases, determine that the client has recorded assets and lease obligations
properly.
d. Review relevant expense accounts and determine if there are entries related to leases.
Which of the following procedures is not a fraud-related audit procedure used to respond to identified
fraud risk factors?
a. Use the work of a specialist for asset valuations, including impairments.
b. All of the above are fraud-related audit procedures.
c. Confirm the terms of significant additions of property or intangibles with other parties
involved in the transaction.
d. Physically inspect tangible assets, including major additions, and agree serial numbers with
invoices or other supporting documents.
When performing preliminary analytical procedures related to long-lived assets, which of the following
should the auditor compare the unaudited financial statements with?
a. Past results.
b. Industry trends.
c. Future company projections.
d. Both A and B.
Which of the following controls is not a typical control that affects multiple assertions for long-lived
assets?
a. Formal budgeting process with appropriate follow-up variance analysis.
b. Periodic comparison of physical assets to subsidiary records with the general ledger.
c. Periodic reconciliations of subsidiary records with the general ledger.
d. Reviewing insurance policies for adequate replacement coverage of assets.
The auditor performs substantive procedures related to property, plant, and equipment to determine if
the assets have been pledged as collateral or title has transferred. What is the primary assertion the
auditor is testing?
a. Rights.
b. Completeness.
c. Existence.
d. Valuation.
In the audit approach for assessing fair value, which should the auditor determine for Level 2 assets?
a. Sensitivity of model used for marking to model.
b. Contingent liabilities.
c. The performance of tests of controls.
d. The correspondence of the client’s assets to similar assets in an active market.
Which of the following expense accounts is associated with natural resources?

a. Depreciation expense.
b. Capitalization expense.
c. Depletion expense.
d. Amortization expense.
Which one of the following does not constitute a probable relationship between accounts?
a. Oil reserves and depreciation.
b. Patent and amortization.
c. Equipment and depreciation.
d. Assets under capital leases and amortization.
Which one of the following is not a management assertion relevant to long-lived assets?
a. Existence.
b. Reporting.
c. Valuation.
d. Completeness.
Which of the following expense accounts is associated with intangible assets with a definite life?
a. Depletion expense.
b. Depreciation expense.
c. Amortization expense.
d. None of the above.
Which one of the following is not an audit procedure used when testing restructuring charges?
a. Evaluate the qualifications of management.
b. Review current and proposed financial accounting standards to determine if changes have
occurred in accounting for restructuring.
c. Review and independently test the estimates by reviewing (a) contracts, (b) appraisals for
property or estimates from investment bankers, and (c) severance contracts.
d. Mathematically test the estimates.
After a natural resource such as gas or coal is used up by the client, the client is responsible for restoring
the land to its original condition. What is the cost of this restoration called?
a. Reclamation expense.
b. Depletion expense.
c. Amortization expense.
d. Impairment expense.
Which of the following approaches for determining fair value of Level 3 assets is used by the auditor?
a. Performing an analysis of volume of trading activity.
b. Reviewing contracts to determine if loss is other than temporary.
c. Determining appropriate model and sensitivity of model.
d. Performing an analysis of trades on similar assets.
Which of the following is not a circumstance indicating potential impairment of intangible assets?
a. Losses or projections indicating continuing losses associated with an asset used to generate
revenue.
b. The asset generates just as much cash flow as in the past.
c. A change in circumstances, such as the legal environment or business climate, that could affect
the asset’s value.
d. An accumulation of costs that are significantly in excess of the amount originally expected to
be needed to acquire or construct the asset.
Which of the following procedures is not a substantive procedure used for testing the valuation of long-
lived assets?
a. Assess management’s impairment estimates.
b. Inquire of management about assets that are idle.
c. Develop an independent estimate of amortization expense.
d. All of the above are procedures used for testing the valuation assertion.
Which of the following assertions are usually the two most relevant assertions related to long-lived
assets?
a. Valuation and completeness.
b. Existence and presentation.
c. Completeness and existence.
d. Existence and valuation.
Which of the following statements is true?

a. Intangible assets should be recorded at fair market value.
b. Intangible assets should be recorded at future market value.
c. Intangible assets should not be recorded.
d. Intangible assets should be recorded at cost.
Which of the following actions is not a potential fraud scheme related to long-lived assets?
a. Impairment losses on long-lived assets are not recognized.
b. Costs that should have been expenses are improperly capitalized.
c. Amortization of intangible assets is miscalculated.
d. All the above are potential fraud schemes.
Which of the following items is not used by natural resource companies to estimate the asset value of
natural resources over the life of the resource, e.g., oil or coal?
a. Reclamation expense.
b. Restoration rate.
c. Reserves.
d. Depletion rate.
The FASB has set a hierarchy of inputs to consider in assessing fair value. Which of the following
valuations are generally viewed as the most subjective?
a. Level 1.
b. Level 3.
c. Level 2.
d. Level 0.
The FASB has set a hierarchy of inputs to consider in assessing fair value. Which of the following relates
to Level 3?
a. Quoted prices for identical items in active, liquid, and visible markets.
b. Unobservable inputs to be used in situations where markets do not exist.
c. Unobservable inputs to be used in illiquid situations.
d. Observable information for similar items in active or inactive markets.
The auditor selects a sample of asset disposals and examines the sales documentation evidencing
disposal of the equipment and recomputes gain or loss on the disposal. This audit procedure primarily
tests which of the following assertions for the equipment account?
a. Existence.
b. Rights.
c. Valuation.
d. Presentation and disclosure.
For intangible assets, controls should be designed to do which of the following?

a. Identify and account for intangible asset impairments.
b. Develop amortization schedules that reflect the remaining useful life of patents or copyrights
associated with the asset.
c. Provide reasonable assurance that decisions are appropriately made as to when to capitalize
or expense research and development expenditures.
d. All of the above.
Which one of the following approaches does not represent how the auditor will become aware of risks
associated with long-lived assets?
a. Reviewing the business plan related to major acquisitions.
b. Obtaining knowledge of the client business.
c. Reviewing the minutes of board of directors’ meetings.
d. All represent how the auditor will become aware of risks associated with long-lived assets and
related expenses.
Which of the following controls related to management’s asset impairment judgments does the auditor
need to understand?
a. A systematic process to identify assets that are not currently in use.
b. Projections of future cash flows that is based on management’s strategic plans and economic
conditions.
c. Systematic development of current market values of similar assets prepared by the client.
d. All of the above.
Which of the following models is associated with Level 3 in the FASB hierarchy for ascertaining fair value?
a. Replacement model.
b. Historical cost model.
c. Mark to model.
d. Mark to market model.
Which is the primary assertion tested in conjunction with obtaining evidence regarding impairment?
a. Cutoff.
b. Rights.
c. Valuation.
d. Existence.
If the auditor is performing substantive procedure to determine whether the long-lived asset balance is
reflected on the balance sheet in the noncurrent section, which of the following assertions is being
tested?
a. Rights and obligations.
b. Completeness.
c. Existence.
d. Presentation and disclosure.
The tour of the manufacturing plant may best assist the auditor in determining which of the following?
a. Estimates of depreciation expense.
b. Management's strategy for assessing impairment.
c. Whether all purchases are authorized.
d. Whether any machinery is inoperative in the production cycle.
Which of the following long-lived assets presents the most difficulty in determining its cost?
a. Equipment.
b. Inventory.
c. Patent.
d. All the above are equally difficult in determining cost.
As natural resources are used up, the client has to recognize which of the following types of expense?
a. Depreciation expense.
b. Reclamation expense.
c. Depletion expense.
d. Amortization expense.
In the FASB hierarchy of inputs to consider for assessing fair value, which is associated with Level 1?
a. Quoted prices on identical items.
b. Nonexistence of active markets.
c. Relevant economic and industry factors.
d. Observable information on similar items.
Assume that the audit team notes the client has made a significant change in its product line which
requires that new equipment be purchased. Which of the following would be of greatest concern to the
auditor?
a. Inappropriate book value of new equipment.
b. Inappropriate depreciation calculation for new equipment.
c. Impaired value of new equipment.
d. Impaired value of old equipment.
Which of the following is not a significant challenge related to valuation issues for audits of merger and
acquisition transactions?
a. Measuring restructuring charges.
b. Measuring the qualifications of personnel from the acquired company.
c. Valuing the assets upon acquisition.
d. Valuing the liabilities upon acquisition.
Which of the following is not an audit challenge relevant to fair value estimation of Level 1, 2, and 3
assets?
a. Assessing client methodology and cash flows to originally estimate value.
b. Determining appropriate model and inputs expected cash flows.
c. Determining similar assets and relevant markets.
d. Determining identical assets and active markets.
A client has implemented a policy requiring the establishment and enforcement of property
management training for all personnel involved in the use, stewardship, and management of equipment.
Which of the following is not a test that could be used in testing the control?
a. Observation.
b. Inquiry.
c. Inspection of documentation.
d. Review of financial statements.
Which of the following should the client have as part of its process for estimating fair value?
a. A process to identify relevant historical values.
b. A systematic process to identify each asset that is subject to realizable value estimation.
c. A realistic process to estimate future cash flows to discount back to a present value.
d. An analysis of transactions that have taken place within the client’s organization.
Which one of the following factors is not an inherent risk associated with long-lived assets?
a. Lack of physical controls over the long-lived assets.
b. Obsolescence of assets.
c. Impairment of assets.
d. Incomplete recording of disposals.
Which of the following is false regarding the valuation of goodwill?

a. Goodwill is tested for impairment quarterly.
b. U.S. accounting standards require that goodwill be specifically identified with an operating
segment or a reporting unit.
c. Goodwill is the excess of the purchase price over the fair market value of the acquired
company’s tangible assets, identifiable intangible assets, and liabilities.
d. By definition, acquired parts of the business (or goodwill) must be sufficiently identifiable so
that they can be managed as a unit or may be separately identified and sold as a unit.
Audit procedures should be proportional to which of the following?

a. Size of the firm.
b. The assessed risks.
c. The assessed misstatements.
d. Size of the client.
If the auditor is testing long-lived asset account balances to see if they include all relevant transactions
that have taken place during the period, what is the primary assertion being tested?
a. Completeness.
b. Existence.
c. Presentation and disclosure.
d. Valuation.
Which of the following information should be included in management’s documentation regarding

intangible assets?
a. Manner of acquisition.
b. Basis for the capitalized amount
c. Expected period of benefit.
d. All the above should be included.
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An auditor’s review of the repair expense to identify any capital expenditures is a test related to which

Which of the following is not a substantive audit procedure for leases?

Which of the following expense accounts is associated with natural resources?

Which of the following statements is true?

For intangible assets, controls should be designed to do which of the following?

Which of the following is false regarding the valuation of goodwill?

Audit procedures should be proportional to which of the following?

Which of the following information should be included in management’s documentation regarding

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