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17-23. a.

Category
Initial Procedures 1)

The following matrix identifies the substantive tests pertaining to property, plant and equipment and the audit objectives pertaining to each.
Substantive Test Specific Audit Objectives
All

Analytical Procedures

Tests of Details of Transactions Tests of Details of Balances

Tests of Details of Accounting Estimates Tests of Details of Presentation and Disclosure

Obtain and understanding of the entity and its environment and determine: a) The significance of plant assets, and changes in plant assets, to the entity. b) Key economic drivers that influence the entitys acquisition of plant assets. c) Industry standards for the extent to which the entity is capital intensive and the impact of plant assets on earnings. d) Understand the degree to which the company has used variable interest entities and operating leases to finance assets. 2) Perform initial procedures on plant assets balances and records that will be subjected to further testing. a) Trace beginning balance for plant assets and accumulated depreciation to prior years working papers. b) Review activity in general ledger accounts plant assets and depreciation expense and investigate entries that appear unusual in amount or source. c) Obtain client-prepared schedules of plant asset additions, retirements and depreciation expense, and determine that they accurately represent the underlying accounting records from which they were prepared by: i) Footing and crossfooting the schedules and reconciling the totals with increases or decreases in the related general ledger balances during the period. ii) Testing agreement of items on schedules with entries in related general ledger accounts. 3) Perform analytical procedures: a) Develop an expectation for plant assets using knowledge of the industry and the entitys business activity b) Calculate ratios: i) Fixed asset turnover ii) Depreciation expense as a percent of sales iii) Repair and maintenance expense as a percent of sales iv) Rate of return on assets c) Analyze ratio results relative to expectations based on prior years, industry data, budgeted amounts, or other data. 4) Vouch plant asset additions to supporting documentation. 5) Vouch plant asset disposals to supporting documentation. 6) Vouch a sample of entries to repairs and maintenance expense. 7) Vouch the recording of new capital lease and operating leases to underlying contracts. 8) Inspect plant asset. a) Inspect plant asset additions. b) Tour other plant assets and be alert to evidence of additions and disposals not included on clients schedules and to conditions that bear on the proper valuation and classification of the plant assets. 9) Examine title documents and contracts 10) Evaluate the fair presentation of depreciation expense by evaluating the appropriateness of useful lives and estimated salvage values. 11) Determine if any significant events have resulted in an impairment of the value of plant assets. 12) Compare statement presentation with GAAP. a) Determine that plant assets and related expenses, gains, and losses are properly identified and classified in the financial statements. b) Determine the appropriateness of disclosures related to the cost, book value, depreciation methods, and useful lives of major classes of plant assets, the pledging of plant assets as collateral and the terms of lease contracts. c) Evaluate the completeness of presentation and disclosures for receivables in drafts of financial statements to determine conformity to GAAP by reference to disclosure checklist.

VA4 EO1, EO4

VA4 VA4 All

EO1, VA1, PD1, EO4, VA4 EO2, VA2, PD2, EO4, VA4 EO3, VA3, PD3, EO4, VA4 EO1, C1, VA1, PD1 EO4 EO4, C1, C2, C4 RO1 VA5 VA6 PD4, PD7 PD4, PD7 PD5 PD6

d) Read disclosures and independently evaluate their understandability.

b. Item No. 1.

2.

3.

4.

Is Audit Adjustment Reasons Why Audit Adjustment or Reclassification or Reclassification is Required or Not Required Required? Yes or No Yes Commissions paid to real estate agents are costs directly related to the acquisition of the property and should be included in the land cost. Costs of removing, relocating, or reconstructing property of others to acquire possession are costs that are directly attributable to conditioning the property for use and should be included in land costs. An adjustment is required for these items so that total land costs can properly be included in Property, Plant & Equipment. No No adjustment is required because clearing costs are costs that are directly attributable to conditioning the property for use and should be included in land costs which are part of Property, Plant & Equipment. Yes Since clearing costs are costs of the land, amounts realized from the sale of materials recovered, such as timber and gravel, should be a reduction of the cost of the land and should not be recorded as other income. Yes All costs relating to the purchase of machinery and equipment should be capitalized. For purchased items such costs would include invoice price, freight costs, and unloading charges. Royalty payments, however, should not be included in the cost of the machinery. Such payments should be charged to expenses as they accrue. The machinery costs, other than royalty payments, should be included in Property, Plant & Equipment.

17-26. (Estimated time - 25 minutes) a. The substantive tests that Andrews should employ in examining the loans are as follows: Obtain an understanding of the business purpose of the loans made by the president. Confirm the loans, including terms, by direct communication. Re-compute (or verify) interest expense and interest payable. Re-compute the long-term and short-term portions of the debt. Review minutes of meetings of the board of directors for proper authorization. Verify payments made during the year and transactions after the year end. Read (notes to) the financial statements and the loan agreements, and evaluate the adequacy of disclosure and compliance with restrictions. Obtain a management representation letter. b. Broadwall's financial statements should disclose the following information concerning the loans from its president: The nature of the related-party relationship The dollar amounts of the loans

Amounts due to the president and, if not otherwise apparent, the terms and manner of settlement.

18-26. (Estimated time - 25 minutes) a. Substantive Test 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Recalculate revenue earned Vouch entries in investment accounts to brokers advice. Confirm securities held by others Inspect and count securities on hand Vouch entries in investment accounts to brokers advice. Inspect and count securities on hand Review documentation concerning market values Verify accuracy of balances, schedules and subsidiary ledgers Compare statement presentation with GAAP Compare statement presentation with GAAP b. Financial Statement Assertion Valuation of allocation All assertions Existence or occurrence, completeness, rights and obligations All except rights and obligations All assertions All except rights and obligations Valuation or allocation Valuation or allocation Presentation and disclosure Presentation and disclosure c. Type of Evidence Mathematical Documentary Confirmation Physical, documentary Documentary Physical, documentary Documentary Mathematical Documentary Documentary

18-30. (Estimated time - 30 minutes) a. Patricia Company Computation of Amount Abstracted by Cashier November 30, 20XO Cash balance, per books November 30, 20XO Add: Credit by bank Adjusted cash balance (on hand and in bank) Less adjusted bank balance: Bank balance, November 30, 20XO Less outstanding checks: 62 182 284 8621 8623 8632 Cash which should be on hand for deposit Cash reported Amount of theft b. $116.25 150.00 253.25 190.71 206.80 145.28 $18,901.62 100.00 $19,001.62 $15,550.00

1,062.29

14,487.71 $ 4,513.91 3,794.41 $ 719.50

The cashier removed $719.50. He attempted to conceal his theft by: o Not listing all outstanding checks. o Underfooting outstanding checks shown on the reconciliation. o Subtracting an item from the bank balance that should be added to book balance. Two controls that were lacking are: o Someone other than the cashier should trace cash receipts to the deposits in the bank o Someone other than the cashier should be responsible for preparing bank reconciliation.

c.

18-32. (Estimated time - 30 minutes) a. The purposes of auditing bank transfers are to (1) determine that bank balances are correctly stated at the balance sheet date and (2) to detect kiting. b. Bank Accounts Ck. No. 2476 2890 3140 A1006 A1245 3402 c. City Bank--Payroll Bank Clearing (Due to Metro Bank--Special) City Bank--Regular Bank Clearing (Due to Metro Bank--Special) Bank Clearing (Due from Metro Bank--Special) City Bank--Regular d. e. 50,000 50,000 25,000 25,000 125,000 125,000 From C--Reg C--Reg C--Reg M--Spec M--Spec C--Reg To C--Pay C--Pay M--Spec C--pay C--Reg M--Spec Amount of Check $100,000 200,000 100,000 50,000 25,000 125,000 Disbursement Date Books 6/23 6/25 6/28 6/29 6/30 7/1 Bank 6/30 7/2 7/5 7/6 7/7 7/5 Receipt Date Books 6/25 6/27 6/30 7/1 7/2 6/30 Bank 6/25 6/27 6/30 7/1 7/2 6/30

Outstanding checks: 2890, 3140, 3402, A1006, A1245 Deposits in transit: 3402 Check 3402 is indicative of kiting because the check was received, recorded, and deposited on June 30, but was not recorded as a disbursement until July 1.

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