Chapter11 - answer - CHAPTER 11 SUBSTANTIVE TESTS OF...

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11-1. Factors which facilitate the auditors’ verification of plant and equipment but are not applicable to audit work on current assets include the following: (a) High peso amount of individual items. A relatively few transactions may support a large balance sheet amount. (b) 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. (c) 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 P30,000 year-end sales transaction to be recorded a day prior to shipment may cause a P30,000 overstatement of the current year’s pretax income. 11-2. The auditors must question the service lives adopted by the client for plant assets. To do otherwise would be to fail in the collection of sufficient competent evidence for the client’s depreciation policies and procedures. 11-3. The principal objective of the auditors in analyzing a Maintenance and Repairs expense account is to disclose any capital expenditures which were erroneously recorded as expense. 11-4. Documentary evidence usually available in the client’s office to substantiate legal ownership of property, plant, and equipment includes deeds, policies of title insurance or abstract of title and an attorney’s opinion as to title, property tax bills, insurance policies, purchase contracts, purchase orders, invoices, and paid checks. The auditors may also secure written representations from the client as to ownership of these assets. 11-5. The auditors employ the following substantive tests to detect unrecorded retirements of property, plant, and equipment: (a) If major additions of plant and equipment have been made during the year, ascertain whether old equipment was traded in or superseded by the new units. CHAPTER 11 SUBSTANTIVE TESTS OF PROPERTY, PLANT AND EQUIPMENT
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11-2 Solutions Manual to Accompany Applied Auditing, 2006 Edition (b) Analyze the Miscellaneous Revenue account to locate any cash proceeds from sale of plant assets. (c) If any of the company’s products have been discounted during the year, investigate the disposition of plant facilities formerly used in manufacturing such products. (d) Inquire of executives and supervisors whether any plant assets have been retired during the year. (e) Examine retirement work orders or other source documents for authorization by the appropriate official or committee. (f)
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Chapter11 - answer - CHAPTER 11 SUBSTANTIVE TESTS OF...

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