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Unformatted text preview: CHAPTER 13 Property, Plant, and Equipment: Depreciation and Depletion Review Questions 13-1 Factors that facilitate the auditors' verification of plant and equipment but are not applicable to audit work on current assets include the following: (1) High dollar amount of individual items. A relatively few transactions may support a large balance sheet amount. (2) Usually little change in property accounts year to year. Land, buildings, and equipment often remain unchanged for many years; hence there is little accounting activity to verify. In contrast, such current assets as accounts receivable and inventory may have a complete turnover several times a year. (3) Minor effect on net income from cutoff errors. Cutoff errors in recording transactions in plant and equipment are much less likely to have a material effect on net income than are errors in the cutoff of transactions for purchase and sale of merchandise. For example, a cutoff error which causes a $30,000 year-end sales transaction to be recorded a day prior to shipment may cause a $30,000 overstatement of the current year's pretax income. The effect on net income of a cutoff error involving plant and equipment is often limited to the error in depreciation. 13-2 The audit of plant and equipment would probably require less time than the audit of current assets because: (1) Transactions in plant and equipment are usually of substantial dollar amount, and relatively few transactions may account for the $5,000,000 balance of plant and equipment. (2) There is often little change in the property accounts from year to year. (3) Errors in year-end cutoff of plant assets transactions do not usually affect net income as do cutoff errors in inventory. 13-3 The principal objective of internal control over property, plant, and equipment is to obtain maximum efficiency from the amounts expended for the assets. Other objectives include (a) safeguarding the assets, (b) maintaining accurate records of property, plant, and equipment, and (c) assuring that acquisitions and retirements are properly authorized. 13-4 Elements of strong internal control for property, plant, and equipment include the following (only three required): (1) A budget to forecast and control acquisitions and retirements of plant assets. (2) A subsidiary ledger consisting of a separate record for each unit of property. (3) A system of authorization requiring advance executive approval of all plant and equipment acquisitions. (4) A reporting procedure assuring prompt disclosure and analysis of variances between authorized expenditures and actual costs. (5) An authoritative written statement of company policy distinguishing between capital expenditures and revenue expenditures....
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- Spring '08