Ch 13

Question 1

Define PPE

Answer 1

Tangible assets with a service life of more than one year that are used in the operation of the business and are not acquired for the purpose of resale.

Question 2

Three major subgroups for PPE:

Answer 2

Land.
Buildings, machinery, equipment and land improvements.
Natural resources.

Question 3

3 audit steps for PPE

Answer 3

Use the understanding of the client and its environment to consider inherent risk, including fraud risks, related to property, plant, and equipment.
Obtain an understanding of internal control over property, plant, and equipment.
Assess the risks of material misstatement related to property, plant, and equipment.

Question 4

Design tests of controls and substantive procedures that:

Answer 4

a. Substantiate the existence of property, plant, and equipment.
b. Establish the completeness of recorded property, plant, and equipment.
c. Verify the cutoff of transactions affecting property, plant, and equipment.
d. Determine that the client has rights to recorded property, plant, and equipment.
e. Establish the proper valuation or allocation of property, plant, and equipment and the accuracy of transactions affecting property, plant, and equipment.
f. Determine that the presentation and disclosure of property, plant, and equipment are appropriate.

Question 5

Audit approach for PPE

Answer 5

Low turnover accounts
Audit approach—audit the changesin the accounts

Question 6

Audit approach for CA, CL

Answer 6

High turnover accounts–audit the balance

Question 7

Controls over PPE

Answer 7

Use of a plant and equipment capital budget.

Maintenance of a subsidiary ledger.(RU HAS ONE)

A system of authorizations.

Analysis of variances from budgeted expenditures.

A statement of policy distinguishing between capital and revenue expenditures.

A requirement that purchases of plant and equipment are subjected to normal purchasing procedures.

Periodic physical inventories.

A system of retirement authorization and documentation.

Question 8

Working papers:
in general and PPE

Answer 8

Summary analysis that emphasizes changes during the year under audit.
Analyses of additions and retirements for the current year.
Analyses of repairs and maintenance expense accounts
Tests of depreciation.

Question 9

For Initial Audits, the beginning balances should be:

Answer 9

Substantiated by review of predecessor firm’s working papers.
If not previously audited, a complete historical analysis of property accounts is needed.
Thorough review of all major charges and credits to property accounts.

Question 10

D. Perform further audit procedures—tests of controls.

Answer 10

Test controls over the purchase and retirement of property, plant and equipment. –are purchases authorized
Test management review controls.
If necessary, revise the risks of material misstatement based on the results.

Question 11

E. Perform further audit procedures—substantive procedures for property, plant, and equipment.

Answer 11

Obtain a summary analysis of changes in property owned and reconcile to ledgers.
Vouch additions to property, plant, and equipment during the year.
Make a physical inspection of major acquisitions of plant and equipment.
Analyze repair and maintenance expense accounts.
Investigate the status of property, plant, and equipment not in current use.
Test the client’s provision for depreciation.
Investigate potential impairments of property, plant, and equipment.
Investigate retirements of property, plant, and equipment during the year.
Examine evidence of legal ownership of property, plant, and equipment.
Review rental revenue from land, buildings, and equipment owned by the client but leased to others.
Examine lease agreements on property, plant, and equipment leased to and from others, and determine that leases are properly accounted for.
Perform analytical procedures for property, plant, and equipment.
Evaluate financial statement presentation and disclosure for plant assets and for related revenue and expenses.

Question 12

Obtain a summary analysis of changes in property owned and reconcile to ledgers..

Answer 12

Valuation

Question 13

Vouch additions during year.
Make physical inspection of major acquisitions.

Answer 13

Existence, occurrence, and rights
Valuation or allocation
Accuracy
Cutoff

Question 14

Analyze repair and maintenance expense accounts.

Answer 14

Valuation or allocation

Question 15

Investigate the status of property not in current use.

Answer 15

Valuation or allocation Presentation and disclosure

Question 16

Test the client’s provision for depreciation. Evaluate and test accounting for impairments.

Answer 16

Valuation and allocation

Question 17

Investigate retirements of property during the year.
Examine evidence of legal ownership.
Review rental revenue.

Answer 17

Existence, occurrence, and rights

Question 18

Evaluate and test accounting for lease agreements.
Perform analytical procedures or data analytics.

Answer 18

Existence and rights
Completeness
Valuation or allocation

Question 19

Evaluate financial statement presentation and disclosure.

Answer 19

Presentation and disclosure

Question 20

On a test basis, vouch purchases of property, plant, and equipment to

Answer 20

invoices, deeds, contracts, or other supporting documents. Recompute extensions, footings, and treatment of discounts. Make certain repairs and maintenance expenses (or other expenses) were not improperly capitalized;

Question 21

Investigate all instances in which the actual cost of acquisitions substantially exceeded

Answer 21

authorized amounts. Determine whether such excess expenditures were analyzed and approved by appropriate officials;

Question 22

Investigate fully any debits to property, plant, and equipment accounts not arising

Answer 22

from acquisition of physical assets;

Question 23

Determine that the total cost of any plant and equipment assets purchased on the installment plan is reflected

Answer 23

in the asset accounts and that the unpaid installments are set up as liabilities;

Question 24

Review changes during the year in construction in progress and examine supporting

Answer 24

work orders, both incomplete and closed; and

Question 25

Trace transfers from the Construction in Progress account to the

Answer 25

property accounts, observing propriety of classification. Determine that all completed items have been transferred out of the account.

Question 26

Acquisition of assets in nonmonetary exchanges:

Answer 26

Generally recorded at fair value, unless:
Fair value is not determinable;
Exchange is to facilitate sales to customers; or
Exchange lacks commercial substance.

Question 27

Self constructed assets should be recorded at

Answer 27

cost of direct materials, direct labor, and applicable overhead.

Question 28

Analyze repairs and maintenance expense accounts to:

Answer 28

Discover items that should have been capitalized.
Use company policy to determine consistency in application.
Analyze monthly amounts for significant variations from:
Month to month.
Between corresponding months of two years.

Question 29

Long-lived assets must be reviewed for impairment whenever _____. Test involves ___. If impairment is indicated by amount of future cash flows ____. May require the use of a ___.

Answer 29

events or changes in circumstances indicate that carrying value may not be recoverable.

projecting future cash flows.

asset must be written down to fair value.

valuation specialist to value the asset.

Question 30

Auditing Fair Values Determined by Valuation Models: 3 steps

Answer 30

Evaluate the appropriateness of the valuation model used.

Consider whether the significant assumptions are reasonable and consistent with economic conditions, existing market information, management’s plans and strategies, past experience, other financial statement assumptions, and the risk associated with the cash flows.

Test the accuracy, completeness, and relevance of the important data on which the fair value measurements are based.

Question 31

Investigate Retirements

Answer 31

Determine if property sold, dismantled, or abandoned without being reflected in accounting records.

Question 32

Steps to discover unrecorded retirements:

Answer 32

For new additions, determine status of old equipment.
Analyze miscellaneous revenue account for cash proceeds.
If company’s products discontinued, investigate disposition of plant facilities.
Inquire of executives and supervisors of plant asset retirements.
Examine retirement work orders for proper authorization.
Investigate any reduction in insurance coverage.

Question 33

Analytical Procedures

Answer 33

Ratios and trends for overall reasonableness of recorded amounts.
ECW believes only “c” make some sense
Maybe also change in depreciation related to change is assets

a. Total cost of plant assets divided by annual output in dollars, pounds, or other units.
b. Total cost of plant assets divided by cost of goods sold.
c. Comparison of repairs and maintenance expense on a monthly basis and from year to year.
d. Comparison of acquisitions for the current year with prior years.
e. Comparison of retirements for the current year with prior years.

Question 34

Presentation and Disclosure and what are the 3 principles

Answer 34

Disclose major classes of depreciable assets.
Accumulated depreciation.
Principles:
a. The basis of valuation should be explicitly stated. At present, cost is the generally accepted basis of valuation for plant and equipment; property not in use should be valued at the lower of cost or estimated realizable value.
b. Property pledged to secure loans should be clearly identified.
c. Property not in current use should be segregated in the balance sheet.

Question 35

Auditors’ Approach for Depreciation

Answer 35

Important because depreciation is an estimate.
Client makes:
Estimate of useful economic life.
Choice of several depreciation methods.

Audit approach for estimate:
Review and test management’s process of developing the estimate.
Review subsequent events or transactions bearing on the estimate.
Independently develop an estimate of the amount to compare to management’s estimate.

Question 36

Audit of depreciation steps

Answer 36

Review the depreciation policies.
Obtain or prepare a summary analysis of accumulated depreciation for the major property classifications as shown by the general ledger control accounts.
Test the provisions for depreciation.
a. Compare rates used in the current year with those employed in prior years.
b. Test computations of depreciation provisions. Generalized audit software can be used to test the depreciation calculations in the client’s records if the client maintains computer-based records.
Perform analytical procedures for depreciation.

Question 37

Natural Resource Properties

Answer 37

Properties subject to depletion.
Similar to depreciation.
Recorded consistently and in accordance with G A A P.
Test mathematical accuracy.
Often rely on specialists for valuation for estimating the total of the natural resource.
Establish ownership.

Question 38

Audit of Intangibles

Answer 38

Intangible assets with definite useful lives are audited similar to property, plant and equipment.
Intangible assets with indefinite useful lives (for example, goodwill) must be tested for impairment.
Auditors often rely on business valuation specialists to value goodwill for tests of impairment.

Question 39

Audit of P P E & Intangible Assets—Advance Work

Answer 39

Most work can be done in advance.
Consideration of internal control can be carried out at any convenient time.
Many firms audit during interim work in October and November.
After balance sheet date, only need to exam transaction for final two or three months.