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? 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 __

No __ __ __ __ __ __ __

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

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 D2 and D3, 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 D3 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 AP4 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 D1 in the prior year working papers. Also complete your audit work on schedules D2, D3, 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 D5. 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.