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Unformatted text preview: Chapter 19 Completing the Tests in the Acquisition and Payment Cycle: Verification of Selected Accounts Review Questions 19-1 Because the source of the debits in the asset account is the acquisitions journal (or similar record), the current period acquisitions of property, plant and equipment have already been partially verified as part of the acquisition and payment cycle. In that testing, the occurrence, completeness, accuracy, cutoff, and classification of acquisitions of property, plant, and equipment would have been examined. The disposal of assets, depreciation and accumulated depreciation are not tested as a part of the acquisition and payment cycle. 19-2 The reason for the emphasis on current period acquisitions in auditing property, plant, and equipment is that there is an expectation that permanent assets will be kept and maintained on the records for several years. The assets carried over from the preceding years can be assumed to have been verified in the prior years' audits. If tests of controls and substantive tests of transactions do not show that all disposals have been recorded, additional testing of the prior balance could be required. A first year audit also necessitates tests of the beginning balance. 19-3 Many clients may accidentally or intentionally record purchases of assets in the repair and maintenance account. The misstatement is caused by a lack of understanding of accounting standards and some clients' desire to avoid income taxes. Repair and maintenance accounts are verified primarily to uncover unrecorded property purchases. In other cases, however, management has fraudulently capitalized repair and maintenance expenses to boost profitability and assets. The auditor typically vouches the larger amounts debited to those expense accounts at the same time that property accounts are being audited. 19-4 The audit procedures that may be applied to determine that all property, plant and equipment retirements have been recorded are as follows: 1. Review whether newly acquired assets replace existing assets and inquire as to whether the old asset has been removed from the books. 2. Analyze gains on the disposal of assets and miscellaneous income for receipts from the disposal of assets. Compare these to property, plant and equipment accounts to see whether the asset has been removed from the books. 19-1 19-4 (continued) 3. Review planned modification and changes in product lines, taxes, or insurance coverage for indications of deletions of equipment. 4. Make inquiries of management and production personnel about the disposal of assets. 19-5 The two considerations to be kept in mind in auditing depreciation expense are: 1. Whether the client is following a consistent depreciation policy from period to period....
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This note was uploaded on 02/02/2012 for the course MGT 101 taught by Professor Smith during the Spring '11 term at University of Florida.
- Spring '11