cpa audit review ch 13 review 5

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cpa audit review ch 13 review 5
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2014-09-30 00:37:08
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cpa audit review ch 13 review 5
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  1. An auditor determines that a client has properly capitalized a leased asset (and corresponding lease liability) as representing, in substance, an installment purchase. As part of the auditor’s procedures, (s)he should

    A.Substantiate the cost of the property to the lessor and determine that this is the cost recorded by the client.

    B.Determine that the leased property is being amortized over the life of the lease.

    C.Evaluate whether the total amount of lease payments represents the fair value of the property.

    D.Evaluate the propriety of the interest rate used in discounting the future lease payments.
    D.Evaluate the propriety of the interest rate used in discounting the future lease payments.

    Under U.S. GAAP, a capital lease is recorded by the lessee as an asset and a liability at the present value of the minimum lease payments. Thus, the interest rate used in the discounting process is an important consideration in determining whether the asset is fairly presented in the balance sheet. The interest rate is the lessee’s incremental borrowing rate, unless the lessor’s implicit rate in the lease is known and is less than the lessee’s incremental rate.
  2. The controller of Excello Manufacturing, Inc. wants to use ratio analysis to identify the possible existence of idle equipment or the possibility that equipment has been disposed of without having been written off. Which of the following ratios would best accomplish this objective?

    A.Accumulated depreciation to the carrying amount of manufacturing equipment.

    B.Repairs and maintenance cost to direct labor costs.

    C.Depreciation expense to the carrying amount of manufacturing equipment.

    D.Gross manufacturing equipment cost to units produced.
    D.Gross manufacturing equipment cost to units produced.

    The ratio of gross manufacturing equipment cost to units produced increases if equipment is taken out of production but is not written off. As replacement equipment is installed, the amount of units produced remains constant, and the gross equipment cost increases. If equipment is taken out of service without being replaced, gross equipment cost remains constant, units produced decline, and the ratio again increases.
  3. In confirming with an outside agent, such as a financial institution, that the agent is holding investment securities in the client’s name, an auditor most likely gathers evidence in support of relevant financial statement assertions about existence or occurrence and
    Rights and obligations.

    External confirmations may be designed to test any financial statement assertion (AU-C 505). However, a given confirmation request does not test all assertions equally well. For example, if the issue is whether securities are being held in the client’s name by an outside agent, the completeness assertion with regard to the investment account is not adequately addressed by a confirmation request. Other agents may be holding securities for the client. Moreover, the agent may be holding other securities not specified in the request. Thus, the request tends to be most effective for testing the existence (whether the assets exist at a given date) assertion and the rights (whether the client has a specified ownership interest in the assets) assertion.
  4. When few property and equipment transactions occur during the year, the continuing auditor usually obtains an understanding of the related internal controls and performs
    Extensive tests of current year property and equipment transactions.

    Testing the details of transactions is the preferable procedure for property, plant, and equipment. The beginning balance has been audited, and subsequent transactions in the account ordinarily are few. The auditor also may not rely on controls after obtaining an understanding of internal control because (s)he believes that (1) no effective controls are relevant to the assertion or (2) testing controls would be inefficient.
  5. In performing a search for unrecorded retirements of fixed assets, an auditor most likely would

    A.Tour the client’s facilities, and then inspect the property ledger and the insurance and tax records.

    B.Tour the client’s facilities, and then analyze the repair and maintenance account.

    C.Analyze the repair and maintenance account, and then tour the client’s facilities.

    D.Inspect the property ledger and the insurance and tax records, and then tour the client’s facilities.
    D.Inspect the property ledger and the insurance and tax records, and then tour the client’s facilities.

    In a search for unrecorded retirements, that is, a test of the completeness assertion, the auditor should first determine from the property ledger what assets are recorded and then tour the facilities to determine whether those assets are physically present. The completeness assertion addresses whether all transactions that should be presented (e.g., retirements) are included in the statements. However, in this case, the completeness assertion is closely related to the existence assertion.

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