Audits of financial statements are designed to test the correctness of account balances.

Required

a. A construction company shows the following assets on its balance sheet

• Construction equipment $1,278,000

• Accumulated depreciation $ 386,000

• Leased equipment-construction $ 550,000 Explain the difference in the three accounts and the underlying accounting.

b. Is the equipment held by the company fairly old or new? Explain.

c. Develop an audit procedure to determine that all leased equipment that should have been capitalized during the year was actually capitalized (as opposed to being treated as a lease expense).

d. The construction equipment account shows that the company purchased approximately $400,000 of new equipment this year. Identify an audit procedure that will determine whether the equipment account was properly accounted for during the year.

e. Assuming the auditor determines the debits to construction equipment were proper during the year, what other information does the auditor need to know in order to ensure that the construction equipment- net of depreciation-is properly reflected on the balance sheet?

f. How can an auditor determine that the client has assigned an appropriate useful life to the equipment and has depreciated it accurately?