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Millie and Catherine have convened a meeting to discuss the upcoming audit of a client's property, plant and equipment accounts. The client is a large,
Millie and Catherine have convened a meeting to discuss the upcoming audit of a client's property, plant and equipment accounts. The client is a large, decentralized entity, so the pair wants to make sure they are as thorough as possible during the audit of this area. Millie has recently joined the firm after graduating college, and asks Catherine to explain some factors and events that might cause the client's property, plant and equipment accounts to decrease. Which of the following is Catherine's best response to this question?
There are various factors that may cause these accounts to decrease. For example, asset acquisitions and retirements are two such factors that would cause us to check to ensure these assets have been removed from the clients' general ledger.
During the last year, the client may have decided to retire fixed assets, or perhaps just dispose of them. The client may have sold them to a third party, which would have implications for gain and loss accounts that we would also want to check.
It is possible that the client has retired certain fixed assets, but has not removed them from the general ledger. This is problematic because it causes a subsequent understatement of fixed assets and overstatement of depreciation expense.
It is feasible that during this past year, the client has depreciated its property, plant and equipment at a higher rate than in prior years. If we ascertain that this is the case, then we need to propose correcting entries to adjust the accounts to their correct balances.
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