What conclusion would you draw about ‘valuation and allocation’ of PPE from the above information? Justify your conclusion.

Fabrication Holdings Ltd (FH) has been a client of K&F for many years. You are an audit senior and have been assigned to the FH audit for the first time for the financial year ending 30 June 2017. During March 2017 you are completing the audit planning for the property, plant and equipment (PPE) account class, which is one of FH’s most material balances. You are also aware that FH has made a large investment in a new manufacturing process to place itself in a more competitive position. Your analytical procedures indicate an increase in acquisitions of PPE.

You are testing the appropriateness of the depreciation rate assigned to PPE, and whether it is consistent with the present condition and expected use of the assets over their remaining life. You have sampled 35 PPE items, with a total dollar value of $1 145 000. The results show that for the sample items some depreciation rates were too low and/or the remaining useful life of the equipment was overstated by management. Together, these issues produce an error in the sample of $68 500. FH has a profit before tax for the current year of $1 875 000, and a PPE account balance at the end of the year of $11 345 000.