You are on page 1of 1

1.

What is one key indicator that depreciation expense


being provided for fixed assets is generally incorrect?: If
fixed assets are regularly being disposed of upon retirement from
service at a gain, this may indicate that the company is
recognizing too much depreciation expense during the life of the
assets and perhaps should more carefully consider depreciation
expense calculation for these assets, including the impact of any
salvage values.
If fixed assets are regularly being disposed of upon retirement
from service or other reasons at a loss, this may indicate that the
company is not recognizing sufficient depreciation expense
during the life of these assets and/or that impairment losses are
also impacting the asset write-off transactions.
2. Why would an auditor be interested in analyzing the
details of the repairs and maintenance expense
account?: A reporting company may have inappropriately
expensed an expenditure that should have been capitalized. If an
outlay was incurred that actually extended the life of an asset or
made it more productive or efficient, this expenditure should have
been capitalized, rather than being expensed. If this situation
has occurred on numerous occasions during the reporting period,
perhaps the company's accounting policies on capitalization
verses expense decisions need to be reviewed, clarified, and/or
updated.
3. In touring a company's plant, the auditor is especially
interested in fixed assets that appear not to be in use.
Why is this situation important to the auditor?: Idle
plant assets should be reclassified into an "other assets" category
that will not be depreciated and may be reduced in value to reflect
their net realizable value. The land, buildings, and equipment
category of assets is reserved for assets that are being used to
generate current revenues. Recognition of possible impairment
for these idle assets certainly should be considered.
4. In auditing land, buildings, and equipment, what
problems should the auditor be aware of that could
prevent fair presentation of these items in the financial
statements?: The auditor should seek evidence about several
potential misstatements of land, buildings, and equipment,
including the following:
1. Total cost of new assets are not properly capitalized, as freight-
in, installation, and other start-up costs are not being
recognized.
2. Depreciation expense is incorrectly computed for the
individual asset classes involved or the realistic lives of the
pertinent assets.
3. Physical assets are retired or disposed of without being
removed from the records or are being incorrectly removed.
4. Asset impairments are not being recognized on a timely basis.
5. Physical assets are not properly monitored and safeguarded to
protect the interests of the entity.
5. What are some substantive tests an auditor can perform
in connection with land, buildings, and equipment?: The
auditor may choose to do some (or all) of the following tests:
1. Recompute depreciation expense.
2. Physically inspect existing assets.
3. Compare book asset lives to actual asset lives being
experienced.
4. Review repair and maintenance expenses for expenditures that
should have been capitalized.
5. Look over loan agreements to see if any assets have been
pledged as security on loans.
6. Review lease agreements (both capitalized and operating) to
determine whether or not leased assets are being properly
reflected and/or disclosed in the financial statements.
6. For assets being held through a lease agreement, what
should the auditor seek to substantiate?: The auditor
needs to verify whether the leased property should be capitalized
or treated as an operating lease. The auditor should also
substantiate that the leases are being properly disclosed in the
financial statements.
7. Why would an auditor review cash receipts at year-end
in connection with the audit of fixed assets?: An
unexplained receipt of cash close to the end of the reporting
period might indicate that a fixed asset has been sold. The
company could simply be in error in not reporting this asset sale
correctly. On the other hand, the company may be attempting to
use this transaction to manipulate net income by leaving the
asset on its books and recording the entire amount collected as
revenue. This situation could even be partial evidence of a sale-
leaseback agreement that has recently taken place.
8. Which management assertion is being tested when the
auditor inspects new additions listed on a document
covering an analysis of the plant and equipment
accounts?: Whenever an auditor makes a physical inspection
of an asset, the auditor is verifying that the property actually does
exist. Thus, evidence is being gathered to provide evidence to
support the existence assertion.
CPA Audit - Property, Plant, and Equipment
Study online at quizlet.com/_3msjh