Ch14+SM+7-24-07+REV - Solutions for Chapter 14 Audit of...

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Unformatted text preview: Solutions for Chapter 14 Audit of Long-Lived Assets and Related Expense Accounts Review Questions: 14-1. Management can manage earnings through fixed-asset accounts by Improperly recording repairs and maintenance costs as fixed assets that should be expensed. Lengthen the estimated useful lives and/or reduce estimated residual value of depreciable assets without economic justification as was done in the Waste Management fraud. 14-2. The major elements of strong internal controls over property, plant, and equipment include: The existence of a computerized property ledger. The property ledger should uniquely identify each asset. In addition the property ledger should provide detail on the cost of the property, the acquisition date, depreciation method used for both book and tax, estimated life, estimated scrap value (if any), and accumulated depreciation to date. The auditor can use the ledger to verify the total costs as reflected on the balance sheet, recomputed depreciation expense, and verify the cost of additions. Authorization procedures to acquire new assets. In particular, the use of a capital budgeting committee to analyze the potential return on investment is a strong control procedure. The auditor can use this to verify the authorization of additions. Periodic physical inventory of the assets and reconciliation with the recorded assets. The auditor can use the inventory results to help determine the existence of the assets and proper recording of disposals. Formal procedures to account for the disposal of assets. This helps the auditor in testing for the completeness of the recording of disposals. Periodic review of asset lives and adjustments of depreciation methods to reflect the changes in estimated useful lives. 14-2 Solutions for Chapter 14 Audit of Long-lived Assets and Related Expense Accounts This helps the auditor in determining the appropriateness of asset lives and any changes in depreciation methods. 14-3. A traditional audit of fixed assets focuses on changes in the accounts during the year, including substantial recalculation of depreciation expense. An integrated audit involves assessing the controls related to these accounts. If the controls are effective, minimal direct testing of changes is needed. In addition, the auditor can estimate depreciation expense rather than recalculating the depreciation expense. 14-4 . The primary analytical test is the computation of the estimate of current year's depreciation. If the client uses straight-line deprecation, the estimate is fairly easy to calculate. Previous year's depreciation expense can be adjusted for asset disposals, additions, and fully depreciated assets. The same approach could be used if accelerated depreciation methods are used, but the estimate would be more complex....
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Ch14+SM+7-24-07+REV - Solutions for Chapter 14 Audit of...

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