AUDITING SP 2008 CH 20 SOLUTIONS

Auditing and Assurance Services (12th Edition)

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Unformatted text preview: 1 Chapter 20 Completing the Tests in the Acquisition and Payment Cycle: Verification of Selected Accounts o Review Questions 20-1 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. The disposal of assets, depreciation and accumulated depreciation are not tested as a part of the acquisition and payment cycle. 20-2 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 it cannot be shown through tests of controls and substantive tests of transactions 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. 20-3 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 generally accepted accounting principles and some clients' desire to avoid income taxes. Repair and maintenance accounts are verified primarily to uncover unrecorded property purchases. The auditor typically vouches the larger amounts debited to those expense accounts at the same time that property accounts are being audited. 20-4 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. If so, 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. 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. 20-1 20-5 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. 2. The accuracy of the client's calculations. An overall reasonableness test can be made by calculating the depreciation rate for the year times the undepreciated fixed assets. In addition, it is desirable to check the accuracy of the depreciation calculation. The extent of the accuracy tests will vary depending on the engagement circumstances....
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AUDITING SP 2008 CH 20 SOLUTIONS - 1 Chapter 20 Completing...

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