Assignment #5 Property, Plant, and Equipment (Fixed Assets)

| November 9, 2018

Assignment #5
Property, Plant, and Equipment (Fixed Assets)

The information that follows is grouped into two
categories: (1) Internal Control and (2) Substantive Audit Procedures. This
information is to be used to complete the exercises.

Relevant Information
Internal Control

The following internal control questionnaire was
completed by Jasper Parsons. Review this questionnaire before you write your
substantive audit program. Keep in mind the six categories of control
procedures: (1) segregation of functions, (2) access, (3) authorization, (4)
input controls, (5) processing controls, and (6) output controls. Then try to
determine potential errors that could occur.

Internal Control Questionnaire-Property, Plant, and Equipment

1. Are
purchases of fixed assets initiated by the purchasing agent?

2. Are all purchases of fixed assets approved by the
Board of Directors?

3. Does
the company have a policy for distinguishing between those items that are to
be capitalized and those that are to be expensed as repairs and maintenance?

4. Are all
retirements authorized by a responsible official?

5. Are
there procedures in effect to assure that all retirements are recorded?

6. Does the
company maintain a fixed asset subsidiary ledger?

7. Is the
fixed asset subsidiary ledger reconciled to the control account periodically?

8. Are
periodic comparisons made between the fixed asset subsidiary ledger and the
actual assets?

Yes

Ö

Ö

__

Ö

Ö

Ö

Ö

Ö

No

__

__

Ö

__

__

__

__

__

Comments

___________________

___________________
Except
for items
authorized
by
board,
left to
discretion
of
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Theodore Brown
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Retirement work
orders are used.

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Every three
years.

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Substantive Audit Procedures

Before you begin your work on fixed assets, carefully
study the prior year’s working papers. For the current year, you had Don
McKenna prepare two schedules, referenced D‑2 and D‑3, providing a detailed
analysis of the additions and disposals to the fixed asset and accumulated
depreciation accounts.

You also had Don prepare a computation of depreciation.
This schedule is referenced D-4. Peach Blossom uses straight-line depreciation
for all fixed assets. The useful life is 30 years on all buildings, 20 years on
all machinery and equipment, four years on all automotive equipment, and 20
years on all furniture and fixtures. These useful lives were adopted by Peach
Blossom after a joint session between their management and your audit firm
several years ago. Also discussed in that meeting was the amount of
depreciation to take in the year a fixed asset was acquired or disposed of. It
was decided that, while it was more accurate to take depreciation for the exact
number of months the assets were owned, it was more practical to take one-half
year of depreciation in the year acquired and one-half year depreciation in the
year of disposal. The firm has been following that policy.

With regard to additions to fixed assets, you may assume
that on December 30, 2009, when you first visited the client’s plant, you were
given a guided tour of the facilities. You were able to move freely around the
plant during the inventory observation on January 1, 2010. While walking around
in the client’s plant, you toured with “eyes open.” After examining
the additions to fixed assets schedule prepared by Don McKenna, you could
recall having seen each of the fixed asset additions as you toured the client’s
facilities.

Don McKenna pulled from the files all cash vouchers and
supporting materials for all disbursements related to fixed asset additions and
repair and maintenance expense. Don summarized all the information from those
vouchers in Exhibit 5. (This information is being provided to you in lieu of
the actual client documents. Treat this material as though it were the actual
client documents belonging to the client and not the auditor.) You may assume
that all the vouchers have the appropriate supporting materials attached and
that all vouchers have been approved.

With regard to the disposal of fixed assets, you may
assume that the client maintains a detailed fixed asset subsidiary ledger from
which you were able to obtain the cost and acquisition dates of assets retired
or otherwise disposed of. You were able to agree the cost and acquisition dates
of the disposal on schedule D‑3 with the fixed asset subsidiary ledger. You may
also assume that you traced the cash proceeds from the fixed asset disposal
transaction into the cash receipts journal.

Required Exercises

1. Prepare a
substantive audit program for fixed asset transactions and balances.

The
construction of a program for fixed asset transactions and balances should
begin with an explicit recognition of the five financial statement assertions:
(1) existence or occurrence, (2) completeness, (3) rights and obligations, (4)
valuation or allocation, and (5) presentation and disclosure. From these
assertions, you should derive your specific audit objectives related to fixed
asset transactions and balances.

Your audit
program should address the five financial statement assertions, as well as any
internal control weaknesses. In this regard, keep in mind the six categories of
control procedures. You may assume that you have satisfied yourself with
respect to any assertions not specifically mentioned in the narrative.

As you write
your program, remember the generalized evidence-gathering procedures of (1)
recalculation, (2) physical observation, (3) confirmation, (4) verbal inquiry,
(5) vouching of documents, (6) tracing, (7) scanning, and (8) analytical
procedures. Use them to help you write the specific evidence-gathering
procedures in your program.

Use form AP‑4 to
write your program. Use the financial statement assertions as the major
headings in your program. List the appropriate audit steps under each of these
captions.

2. Prepare a
summary schedule of property, plant, and equipment similar to schedule D‑1 in the
prior year working papers. Also complete your audit work on schedules D‑2, D‑3,
and D-4.

A final
schedule prepared for you in the fixed assets area by Don McKenna is an
analysis of the Repairs and Maintenance account. This schedule is referenced D‑5.
Carefully examine the vouchers listed on this schedule and in Exhibit 5 to
determine whether items were properly treated. Prepare any adjustments you
believe are necessary.

AP-4

Substantive Audit Program-Property, Plant and Equipment

Assertions

Begin with the list of assertions below and add others
you think appropriate. Then write your audit program to test those assertions.

1. All recorded
fixed assets are in productive use.
2. All asset
disposals have been recorded.
3. All asset additions
have been recorded.
4. Repair and
maintenance expenses have not been capitalized.
5. Asset additions
have not been charged to repairs and maintenance expense.
6. All freight,
installation, taxes, etc. on additions have been capitalized.
7. Depreciation
has been calculated accurately.
8. Assets pledged
as collateral have not been improperly removed.

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Program Steps
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