Question

AUDITING CASE STUDY 016-20 Non-current assets are being audited and the following factors have been discovered: Motor vehicles are depreciated at 25% pa straight line (full year charge in the year of acquisation, no charge in the year of disposal). The cost of the vehicles at the end of the period is $200.000 and the depreciation charge for the year is $50.000. Because mosts care are kept for at least 5 years the company is thinking of changing its depreciation rate for cars to %20 pa. So that the charge would become $40.000. 16. Which of the following is correct? a) Physical inspection of the cars verifies cut-off b) Pysical inspection of the cars verifies rights and oblications c) Pysical inspection of the cars verifies existence d) Pysical inspection of the cars verifies completeness 17. Which of the following is correct? a) Impairement of a non-current asset could be identified by recalculation b) Impairement of a non-current asset could be identified by inspection c) Impairement of a non-current asset could be identified by analytical procedures d) Impairement of a non-current asset could be identified by reperformance

Answer 1

The following question has 5 sub questions. As per the company policy I am answering the first 4 sub questions.

16) The correct answer is C.

Justification: Physical verification is actually checking the physical existence of a particular object. Now , just by looking at a particular object , the only thing which can be concluded is whether that object exists or not. Thus the correct answer is ," Physical verification of Cars verifies existence".

17) The correct answer is B.

Justification: In a nutshell, it means the asset's carrying value isn't recoverable from its undiscounted cash flows. ... When the carrying value of an asset or group of assets, such as an operating segment, is more than its fair value, the company may have an impairment event on its hands.

Thus , the condition of any non current asset can only be concluded through its physical verification and thus inspection.

18) The correct answer is B. They both are certainly too low.

Justification: The carring value of the asset is 200,000. The company is charging depreciation at the rate of 25%. however , now it is being changed to 20%. High or low is a matter of materiality. Taking the material tu as 40% or even 50% , both of these rates are much lower than the material rates. Thus they are too low. The 50% of materiality rate is arrived by taking the average life of usage of motor vehicle as 2 years.

19,) The correct answers are e and f.

Justification: The depreciation amount by recalculating the depreciation based on the actual rates and value of the asset.

Also , the depreciation amount is verified by valuation of assertion as the act of verifying depreciation is nothing but ensuring the correctness of the value of the assertion of depreciation.