1. What is one key indicator that depreciation expensebeing provided for fixed assets is generally incorrect?: Iffixed assets are regularly being disposed of upon retirement fromservice at a gain, this may indicate that the company isrecognizing too much depreciation expense during the life of theassets and perhaps should more carefully consider depreciationexpense calculation for these assets, including the impact of anysalvage values.

If fixed assets are regularly being disposed of upon retirementfrom service or other reasons at a loss, this may indicate that thecompany is not recognizing sufficient depreciation expenseduring the life of these assets and/or that impairment losses arealso impacting the asset write-off transactions.

2. Why would an auditor be interested in analyzing thedetails of the repairs and maintenance expenseaccount?: A reporting company may have inappropriatelyexpensed an expenditure that should have been capitalized. If anoutlay was incurred that actually extended the life of an asset ormade it more productive or efficient, this expenditure should havebeen capitalized, rather than being expensed. If this situationhas occurred on numerous occasions during the reporting period,perhaps the company's accounting policies on capitalizationverses expense decisions need to be reviewed, clarified, and/orupdated.

3. In touring a company's plant, the auditor is especiallyinterested in fixed assets that appear not to be in use.

Why is this situation important to the auditor?: Idleplant assets should be reclassified into an "other assets" categorythat will not be depreciated and may be reduced in value to reflecttheir net realizable value. The land, buildings, and equipmentcategory of assets is reserved for assets that are being used togenerate current revenues. Recognition of possible impairmentfor these idle assets certainly should be considered.

4. In auditing land, buildings, and equipment, whatproblems should the auditor be aware of that couldprevent fair presentation of these items in the financialstatements?: The auditor should seek evidence about severalpotential misstatements of land, buildings, and equipment,including the following:1. Total cost of new assets are not properly capitalized, as freight-in, installation, and other start-up costs are not beingrecognized.2. Depreciation expense is incorrectly computed for theindividual asset classes involved or the realistic lives of thepertinent assets.3. Physical assets are retired or disposed of without beingremoved from the records or are being incorrectly removed.4. Asset impairments are not being recognized on a timely basis.5. Physical assets are not properly monitored and safeguarded toprotect the interests of the entity.

5. What are some substantive tests an auditor can performin connection with land, buildings, and equipment?: Theauditor may choose to do some (or all) of the following tests:1. Recompute depreciation expense.2. Physically inspect existing assets.3. Compare book asset lives to actual asset lives beingexperienced.4. Review repair and maintenance expenses for expenditures thatshould have been capitalized.5. Look over loan agreements to see if any assets have beenpledged as security on loans.6. Review lease agreements (both capitalized and operating) todetermine whether or not leased assets are being properlyreflected and/or disclosed in the financial statements.

6. For assets being held through a lease agreement, whatshould the auditor seek to substantiate?: The auditorneeds to verify whether the leased property should be capitalizedor treated as an operating lease. The auditor should alsosubstantiate that the leases are being properly disclosed in thefinancial statements.

7. Why would an auditor review cash receipts at year-endin connection with the audit of fixed assets?: Anunexplained receipt of cash close to the end of the reportingperiod might indicate that a fixed asset has been sold. Thecompany could simply be in error in not reporting this asset salecorrectly. On the other hand, the company may be attempting touse this transaction to manipulate net income by leaving theasset on its books and recording the entire amount collected asrevenue. This situation could even be partial evidence of a sale-leaseback agreement that has recently taken place.

8. Which management assertion is being tested when theauditor inspects new additions listed on a documentcovering an analysis of the plant and equipmentaccounts?: Whenever an auditor makes a physical inspectionof an asset, the auditor is verifying that the property actually doesexist. Thus, evidence is being gathered to provide evidence tosupport the existence assertion.

CPA Audit - Property, Plant, and EquipmentStudy online at quizlet.com/_3msjh