AUDITING QUESTION

Note: Please explain your answer thoroughly in great detail. Thank you!

Propel Equipment rents heavy equipment, such as cranes, bulldozers, and dump trucks, to industrial contractors. One of Propels larger expenses is repairs and maintenance on the rental equipment. The companys policy is to capitalize repairs that improve the useful life or increase the operating efficiency of the equipment. Routine repair and maintenance costs should be expensed as incurred. Business has been slow for the last two quarters, so Propel is taking advantage of the down time to catch up on repair and maintenance items.

Propels auditors have completed their risk assessment procedures and noted the increased activity with repairs and maintenance. Since business is slow, auditors also noted there is increased risk that management may try to understate expenses to inflate profit.

Required

a. If Propel management incorrectly capitalizes repairs and maintenance expenses, evaluate which accounts and assertions are at risk of misstatement.

b. If auditors determine there is increased risk for understatement of expenses, how does that impact the sufficiency and appropriateness of the audit evidence?