Question

Following are the four assertions about account balances that can be applied to the audit of a company’s PP&E, including assets the company has constructed itself: existence, rights and obligations, completeness, and valuation and allocation.

Required:

For each of the following substantive procedures, (1) cite one assertion most closely related to the evidence the procedure will produce (the primary assertion) and (2) when appropriate, cite one or more other assertions that also are related to the evidence the procedure will produce—the secondary assertion(s).

a. For major amounts charged to PP&E and a sample of smaller charges, examine supporting documentation for expenditure amounts, budgetary approvals, and capital work orders.

b. For a sample of capitalized PP&E, examine construction work orders in detail.

c. For a sample of construction work orders, vouch time and material charges to supporting payroll and material usage records. Review the reasonableness of the hours worked, the work description, and the material used.

d. Evaluate the policy and procedures for allocating overhead to the work orders, and recalculate their application.

e. Determine whether corresponding retirements of replaced PP&E have occurred and have been properly entered in the detail records.

f. Select major additions for the year and a random sample of other additions, and inspect the physical assets.

g. Vouch a sample of charges in the Repairs account, and determine whether they are proper repairs, not capital items.

h. Review the useful lives, depreciation methods, and salvage values for reasonableness. Recalculate depreciation.

i. Study loan documents for terms and security of loans obtained for purchase of PP&E.

j. Inspect title documents for automotive and real estate assets.

k. Analyze the productive economic use of PP&E to determine whether any other-than-temporary impairment is evident.

Answer 1

ANSWER

As per the given question,

a For major amounts charged to PP&E and a sample of smaller charges, examine supporting documentation for expenditure amounts, budgetary approvals, and capital work orders.

Valuation, Existence

b For a sample of capitalized PP&E, examine construction work orders in detail.

Valuation

c For a sample of construction work orders, vouch time and material charges to supporting payroll and material usage records. Review the reasonableness of the hours worked, the work description, and the material used.

Valuation

d Evaluate the policy and procedures for allocating overhead to the work orders and recalculate their application.

Valuation and Allocation

e Determine whether corresponding retirements of replaced PP&E have occurred and have been properly entered in the detail records.

Existence

f Select major additions for the year and random samples of other additions and inspect the physical assets

Existence

g Vouch the samples of charges in repairs account….

Completeness

h Review the useful lives, depreciation methods, and salvage values for reasonableness. Recalculate depreciation.

Valuation and Allocation

i Study loan documents for terms and security of loans obtained for purchase of PP&E.

Rights and obligations

j Inspect the documents for automotive and real-estate assets

Rights

k Analyze the productive economic use of PP&E to determine whether any other-than-temporary impairment is evident.

Valuation

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