CAF-8 · Chapter 8

Substantive Procedures: Non-Current Assets MCQs with Answers

10 multiple-choice questions on Substantive Procedures: Non-Current Assets for CAF-8 Audit and Assurance Essentials. Try each one before revealing the answer and explanation.

1. Question 1

   An auditor is verifying the ownership of a client's fleet of commercial vehicles. Which of the following is the most appropriate source of evidence for the assertion of 'Rights and Obligations'?

   • A) Physical inspection of the vehicles in the parking lot.
   • B) Inspection of the original registration books (v-5 documents) and insurance certificates in the name of the company.
   • C) Reviewing the repair and maintenance invoices for the year.
   • D) Inquiring of the drivers if they like the vehicles.
   Show answer & explanation

   Answer: B) Inspection of the original registration books (v-5 documents) and insurance certificates in the name of the company.

   To verify 'Rights and Obligations' (ownership), the auditor must inspect legal title documents like registration papers or purchase contracts. Physical inspection only proves 'Existence'.

2. Question 2

   To test the 'Existence' assertion for a new, expensive piece of manufacturing machinery, which procedure is most effective?

   • A) Recalculating the depreciation expense related to the machine.
   • B) Selecting the machine from the fixed asset register and physically inspecting it in the factory.
   • C) Vouching the purchase invoice to the bank statement.
   • D) Confirming with the supplier that the machine was shipped.
   Show answer & explanation

   Answer: B) Selecting the machine from the fixed asset register and physically inspecting it in the factory.

   Tracing from the accounting records (Fixed Asset Register) to the physical asset in the factory confirms that the asset recorded actually exists.

3. Question 3

   Which of the following is NOT a substantive procedure for verifying the valuation of property, plant, and equipment (PPE)?

   • A) Recalculating the current year's depreciation charge.
   • B) Reviewing the useful lives and residual values for reasonableness.
   • C) Inspecting the director's minutes for approval of the asset purchase.
   • D) Comparing the carrying amount of an asset to its estimated recoverable amount if indicators of impairment exist.
   Show answer & explanation

   Answer: C) Inspecting the director's minutes for approval of the asset purchase.

   Inspecting minutes for approval is a test of control addressing 'Authorization', not a substantive test of 'Valuation'. Recalculating depreciation and impairment testing address Valuation.

4. Question 4

   An auditor discovers that a client has capitalized the entire cost of a major factory roof repair as a non-current asset. The repair only restored the roof to its original condition. What is the impact on the financial statements?

   • A) Non-current assets are understated and expenses are overstated.
   • B) Non-current assets are overstated and expenses are understated.
   • C) Both assets and expenses are correctly stated.
   • D) The cash balance is incorrectly recorded.
   Show answer & explanation

   Answer: B) Non-current assets are overstated and expenses are understated.

   Repairs that only restore an asset's original condition (revenue expenditure) should be expensed. Capitalizing them wrongly inflates assets and hides expenses, overstating profit.

5. Question 5

   Which procedure addresses the 'Completeness' assertion of non-current assets?

   • A) Vouching a sample of entries in the Fixed Asset Register to purchase invoices.
   • B) Physically inspecting a sample of assets seen in the factory and tracing them back to the Fixed Asset Register.
   • C) Reviewing the repairs and maintenance account for items that should have been capitalized.
   • D) Both B and C are correct.
   Show answer & explanation

   Answer: D) Both B and C are correct.

   Completeness is tested by going from the physical world (Floor to Register) or by looking for missing items in expense accounts (Repairs to Register) that should be recorded as assets.

6. Question 6

   A client recently revalued its head office building. According to ISA 540, what is the auditor's primary responsibility regarding this accounting estimate?

   • A) Act as the independent valuer for the client to save costs.
   • B) Evaluate the reasonableness of the assumptions and methods used by management's expert.
   • C) Automatically accept the valuation if the expert is a member of a professional body.
   • D) Insist that the client uses the historical cost model instead.
   Show answer & explanation

   Answer: B) Evaluate the reasonableness of the assumptions and methods used by management's expert.

   When management uses an expert for a valuation, the auditor must evaluate the expert's competence and the reasonableness of their assumptions and data.

7. Question 7

   An auditor is testing the depreciation of fully depreciated assets that are still in use. What is the correct accounting treatment for these assets?

   • A) They should be removed from the Fixed Asset Register and the financial statements immediately.
   • B) They should stay on the register at cost and accumulated depreciation, but no further depreciation should be charged.
   • C) The auditor should insist the client records 'negative' depreciation to offset past charges.
   • D) The cost of the assets should be written off to the income statement.
   Show answer & explanation

   Answer: B) They should stay on the register at cost and accumulated depreciation, but no further depreciation should be charged.

   Assets still in use remain on the balance sheet at their historical cost and 100% accumulated depreciation. They are not depreciated further once their carrying amount reaches their residual value.

8. Question 8

   To verify the 'Classification' of a leased asset, the auditor must determine if it is a right-of-use asset under IFRS 16. What document must be inspected?

   • A) The bank reconciliation statement.
   • B) The lease agreement and the terms of the contract.
   • C) The company's organizational chart.
   • D) The petty cash book.
   Show answer & explanation

   Answer: B) The lease agreement and the terms of the contract.

   The lease agreement contains the essential terms (duration, payments, transfer of control) required to determine the correct accounting treatment and classification of the asset.

9. Question 9

   Which of the following would lead an auditor to suspect that a non-current asset is 'Impaired'?

   • A) The asset is being used 24 hours a day to meet high sales demand.
   • B) The asset is significantly damaged, or its market value has dropped drastically due to technological obsolescence.
   • C) The asset has been fully paid for earlier than expected.
   • D) The asset has been painted a new color.
   Show answer & explanation

   Answer: B) The asset is significantly damaged, or its market value has dropped drastically due to technological obsolescence.

   Physical damage, obsolescence, or a significant decline in market value are key 'indicators of impairment' that require a formal impairment test under IAS 36.

10. Question 10

    An auditor selects 20 assets from the Fixed Asset Register and physically inspects them, but 2 assets cannot be located. What is the most likely conclusion?

    • A) Assets are understated.
    • B) Non-current assets are overstated because fictitious or disposed-of assets are still on the register.
    • C) The company's tax rate is too high.
    • D) The depreciation method is incorrect.
    Show answer & explanation

    Answer: B) Non-current assets are overstated because fictitious or disposed-of assets are still on the register.

    If an asset is in the records but not physically present, the record is overstating the actual resources owned by the company (Existence failure).