Question

USSC Case:

QUESTIONS 1. Identify audit procedures that, if employed by Ernst & Whinney during the 1981 USSC audit, might have detected the overstatement of the leased and loaned assets account that resulted from the improper accounting for asset retirements

2. In 1981, USSC extended the useful lives of several of its fixed assets and adopted salvage values for many of these same assets that previously had not been assigned salvage values. Áre these changes permissible under generally accepted accounting principles? Assuming that these changes had a material effect on USSC's financial condition and results of operations, how should they have been disclosed in the company's financial statements? How should these changes have affected Ernst & Whinney's 1981 audit opinion? (Assume that the current audit reporting standards were in effect at the time.)

Answer 1

1)	The following audit procedures along with test of controls would help increase the possibility of detectingthe overstatement.
	Control Objective: Determine whether the company has adequate and effective disposal policies andprocedures, which will aid in maintaining accurate fixed asset records.
	The auditors previous to performing year-end substantive tests on such an account should firstassess the level of control risk for that account taking into matter the two primary considerationsregarding the design effectiveness and operating effectiveness. For example, the auditor isworried with the controls for given accounts are adequately designed to minimize the materialerrors affecting the account balance. When considering operating effectiveness, the auditorshould determine the controls that have been established by the client are actually operating asintended in the first place. Also, the auditors must have identified the controls that U.S.S.C hadestablished to guarantee that the cost of retired leased and loaned assets was removed from thesubsidiary ledger. For example, the company should have had a procedure for authorizing theretirement of such assets, or any related procedure to ensure that retired assets were placedproperly and are under a control policy to ensure that retirement transactions triggered the properaccounting entries. Test of Control (Procedure): Review the policies for disposing of/ retiring capital assets. Review theauthorization policies for capital asset disposal/ retirements. Review the policies for reporting items thatare retired or abandoned. Make a note of how applicable gains/losses are recognized. On a sample basis, select 5 retired capital assets from the fixed assets records and perform the followingtests: Assess whether the assets retirement was properly approved and whether this was done on a timelybasis. Establish whether record of the asset retired was properly removed from the general ledger andfixed asset register (if no longer in use). Check whether any applicable gains and losses were recognizedand reported on a timely basis.
2)	FASB currently emphasizes that depreciation accounting “is a process of allocation, not of valuation” and describes it as the expense that results from the systematic and rational allocation of the cost of a productive facility or other tangible capital asset, less salvage (if any), as equitably as possible to the periods during which services are obtained from the use of the asset (i.e., its “useful life”) [Accounting Standards Codification (ASC) 360-10-35-4]. Although it is not generally well-known or observed in practice, GAAP also provides that the depreciation method should be selected and supportable based upon management’s judgment as to what will likely provide the most satisfactory allocation of cost, considering whether “the expected productivity or revenue-earning power of the asset is relatively greater during the earlier years of its life” (ASC 360-10-35-7).
	In 1971, the AICPA’s Accounting Principles Board (APBO) issued Opinion 20, Accounting Changes, para. 10 of which asserted that the service lives and salvage values of depreciable assets are in fact examples of accounting estimates that may require adjustments from time to time based upon an assessment of changing circumstances and the exercise of judgment by management “as more experience is acquired, or as additional information is obtained.” Paras. 31–33 prescribed accounting and disclosure guidance as to material changes in such estimates.
	When APBO 20 was superseded in 2005 by FASB’s Statement of Financial Accounting Standards (SFAS) 154, Accounting Changes and Error Corrections—A Replacement of APB Opinion No. 20 and FASB Statement No. 3, the foregoing principles and requirements remained embedded without substantive change in the general definition of a change in accounting estimate, with the accounting for such estimates prescribed by paras. 19–20 of APBO 20 (ASC 250-10-45-17, 18). Meanwhile, the need to reconsider the estimated remaining useful lives and salvage values of depreciable assets, particularly in connection with periodic impairment assessments, was reinforced in paras. 9 and 28 of SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets (ASC 360-10-35-22). Despite the presence of material impairment adjustments in many financial statements, however, there is rarely any mention of a concurrent shortening of the impaired asset’s estimated useful life for purposes of accelerating future depreciation charges.