Task 2: Substantive Analytical Procedures for Testing Depreciation Expense

The audit team has determined that substantive analytical procedures will be used to audit the depreciation expense account. Last year the depreciation expense account was also audited using substantive analytical procedures, and no errors were noted. The client provided its formal Fixed Asset Depreciation Policy (see PBC Documents file), which may help you during your testing. As with the substantive testing performed during Task 1, you will document your testing electronically in various tabs within the Excel Work Papers file provided with this case. To test depreciation expense, finish completing the steps in the audit program for depreciation, located in the Excel Work Papers file provided with this case under the tab labeled "WP #5620—Audit Program—Depreciation." You will notice the senior has already completed and signed off on Step 1 of the audit program, obtained the trial balance from the client. Your senior had previously obtained the trial balance and used audit software to break up the trial balance into separate "lead sheets" for each major area of testing. You will only need the Depreciation Expense Lead Sheet for this task. Your senior provided you with the Depreciation Expense Lead Sheet (WP #5625—Depreciation Lead Sheet), which you will use in your testing. You can begin with Step 2 of the audit program. After you complete each step, sign off on both the Excel Work Paper where you performed your work and on the Audit Program itself. Also, indicate on the Audit Program which management assertion you think the step best addresses. Use the following guidance and tips as you complete each step.

1.?Step 2 of the Audit Program (WP #5620—Audit Program—Depreciation) requires you to agree the prior year depreciation expense listed in the Depreciation Expense Lead Sheet (WP #5625—Depreciation Lead Sheet) to the prior year audited balances from the prior year working papers. If the amount listed in the 2010 column of the Depreciation Expense Lead Sheet agrees to the amount you find in the prior year working papers, you should indicate that they agree by placing a commonly used tick mark "PY" in the tick mark column to the right of the 2010 balance. If the account balance does not agree, you will need to perform additional investigation as to why it does not agree and then document the reasons using a specific tick mark.

2.?Step 3 of the Audit Program requires you to perform substantive analytical procedures to test depreciation expense for the year ended December 31, 2011. You will perform this testing in the tab, WP #5630—Depreciation Expense Testing.

The substantive analytical procedures you will use to audit this balance involve calculating an "expectation" for December 31, 2011 depreciation expense. The work paper (WP #5630—Depreciation Expense Testing) in the Excel Work Papers file has already been set up for you based on the senior's idea for calculating an expectation of December 31, 2011 depreciation expense. You should be able to fill in balances, formulas, and references/tick marks as needed. In this case, the senior has determined that a reasonable expectation for December 31, 2011 depreciation expense can be calculated by applying a ratio based on last year's audited depreciation expense and last year's gross PPE (see WP #5630 for guidance calculating last year's ratio).

Once you have calculated your expectation of December 31, 2011 depreciation expense, compare your expectation to actual recorded December 31, 2011 depreciation expense. The difference between your calculated expectation and the actual recorded amount should be compared to the pre-determined threshold. The pre-determined threshold is our previously noted materiality amount, $1,000. Any difference between the expectation and the recorded amount that is greater than the pre-determined threshold will need to be further investigated with the help of the client.

Should you discover the need to talk to the client, be ready to explain how you calculated your expectation and ask him/her for ideas for why the expectation is materially different than the recorded balance. Remember, you must get evidence corroborating any client explanations. This investigation may result in you discovering a misstatement in the depreciation expense account; alternatively, it may result in you discovering that you need to revise your calculation of the expected depreciation expense based on a valid reason. You will need to use professional judgment to determine how to proceed after your investigation. Be sure to complete the work papers with appropriate references and specific tick marks as needed to explain the amounts found on your work paper. You will want to describe in a tick mark any formula you used to arrive at an amount. If you need to make revisions to the way you calculate the expected depreciation expense, do not do so over your original calculations. Leave your original calculations as are and include the detail of your new calculations with revisions at the bottom of the Depreciation Expense Testing work paper. Also, be sure to explain carefully in a specific tick mark what is adjusted and why it is needed.

 

Excel Work Papers . ExcelSearchAghaHomeInsertPage LayoutFormulasDataReviewViewHelpfxBCDEFGHKProperty Lead SheetWorkpaperProperty, Plant & Equipment - Gross5610Initials/DateAccount # Acct Description 12/31/11 Balance Tick Mark12/31/10 Balance Tick Mark100 Land651,267651,267200 Building927,816802,349300 Furniture & Fixture148,667125,043400 Computer315,965251,872Total Gross Property2,043, 7151,839,531WP #4001 - PPE Controls TestingTick Marks for Control TestingWP #5600 - Audit ProgramWP#5610 - Lead SheetTick Marks for t Excel Work Papers - ExcelOSearchAghasianFileHomeInsertPage LayoutFormulasDataReviewViewHelpM14XfxBCDEFGHKLMProperty Roll ForwardProperty, Plant & Equipment - GrossWorkpaper5615Initials/Date12/31/20102011201112/31/201110BalanceAdditionsDisposalsBalance1112 Land651,267651,2671314 Building802,349203,5641,005,9131516 Furniture & Fixtures125,04336,08712,463148,6671718 Computer251,87272,8468, 754315,9641920 Total1,830,531312,49721,2172,121,8112122232425Tick Marks for Control TestingWP #5600 - Audit ProgramWP#5610 - Lead Sheet Tick Marks for Lead SheetWP#5615 - Roll ForwardType here to search56 F Partly HomeInsertPage LayoutFormulasDataReviewViewHelpA21XVfix 2BCDEFGHKMAdditions Testing WorkpaperTick Marks/ReferencesWorkpaperBalance to be tested for 2011 Additions5615-AInitials/DateBalance per the Detailed Additions listingDifferenceSample Size Calculated2 {a}131415Testing16PhysicalExistene17SubselectedDateAssetInvoiceChecke18 Sample #AmtAddedDescriptionInvoice # Invoice DateAmountCheck #Date Check Amt verified?19202122223WP#5610 - Lead Sheet Tick Marks for Lead SheetWP#5615 - Roll ForwardTick Marks for Roll ForwardWP#5615-A - Additions TestingReadyType here to search56 F Partly su Excel Work Papers - ExcelSearchAghasion, ArsiFileHomeInsertPage LayoutFormulasDataReviewViewHelpAgree the prior year depreciation expense balance listed in the trial balance to the prior year audited balance from the prior yeEFGHKMAudit Program - Testing of Depreciation ExpenseAssertionPerformed Work paperStep # Task to Be PerformedTestedbyReferences1Obtain a trial balance from the client, containing N/AMLP5625both the current year (12/31/2011) and prior2/7/2012year (12/31/2010) balances.2Agree the prior year depreciation expensebalance listed in the trial balance to the prioryear audited balance from the prior year workingpapers.3Perform substantive analytical procedures to testdepreciation expense for the year ended12/31/2011.+WP#5615 - Roll Forward Tick Marks for Roll Forward WP#5615-A - Additions TestingTick Marks for Add. TestingWP#5620 - Audit Prog Excel Work Papers - ExcelSearchAghaHomeInsertPage LayoutFormulasDataReviewViewHelpXfxInitials/DateBCDEFGHJKDepreciation Expense Lead SheetWorkpaper5625Initials/DateAccount # Acct Description12/31/11 Balance Tick Mark12/31/10 Balance Tick Mark7000 Depreciation Expense65,94962,397WP#5615-A - Additions TestingTick Marks for Add. TestingWP#5620 - Audit Prog - DepreciaWP#5625 - Deprec Lead SheetTick Excel Work Papers - ExcelSearchInsertPage LayoutFormulasDataReviewViewHelpFileHomeE17XVfxEFGHKLMNABDDepreciation Expense Testing WorkpaperWorkpaper5630Initials/DateNote - In accordance with our substantive testing strategy described in workpaper 1810, Kerzman and Leewill test 2011 depreciation expense using substantive analytical procedures. Based on our understanding ofchanges in property, plant and equipment from the prior year to the current year, we will calculate an"expected balance" for depreciation expense for 201 1 based on the ratio of 2010 depreciation expense tothe average PPE balance from the 2010. Based on our assessment of risks in this account, materiality, andour professional judgment as described at workpaper 1710, we set the threshold for further investigation at$1,000. See below for testing.10 Calculation of Prior Year Ratio of Depreciation Expense to Prior Year Average Gross PPE+1112Tick Marks/References13 2010 Recorded Depreciation Expense1415 Jan 1, 2010 Balance of Gross PPE1,687,023 PY16 Dec 31, 2010 Balance of Gross PPE17WP#5620 - Audit Prog - DepreciaWP#5625 - Deprec Lead SheetTick Marks for Depr Lead SheetWP#5630 - Depre Exp TestingTicReadyType here to search56.F 19Excel Work Papers - ExcelLOSearchFileHomeInsertPage LayoutFormulasDataReviewViewHelpE17XVfxABCDEFGHKLM12Tick Marks/References13 2010 Recorded Depreciation Expense1415 Jan 1, 2010 Balance of Gross PPE1,687,023 PY16 Dec 31, 2010 Balance of Gross PPE18 Average Balance of 2010 Gross PPE192010 Depreciation Exp Divided by20 Average Balance of 2010 Gross PPE2722 Calculation of Expected Current Year Depreciation2324 Jan 1, 2011 Balance of Gross PPE5 Dec 31, 2011 Balance of Gross PPE2627 Average Balance of 2011 Gross PPE18+2010 Depreciation Exp Ratio9 (calculated above)01 Expected 201 1 Depreciation Expense2Actual 2011 Recorded DenrecWP#5620 - Audit Prog - DepreciaWP#5625 - Deprec Lead SheetTick Marks for Depr Lead SheetWP#5630 - Depre Exp Testing Excel Work Papers - ExcelOSearchFileHomeInsertPage LayoutFormulasDataReviewViewHelpE17XfxABCDEFGHKLM27 Average Balance of 2011 Gross PPE282010 Depreciation Exp Ratio29 (calculated above)3031 Expected 201 1 Depreciation Expense3233 Actual 2011 Recorded Deprec.3435 Difference36Predetermined Threshold for Tolerable37 Difference1,00038394041+42434445464748WP#5620 - Audit Prog - DepreciaWP#5625 - Deprec Lead SheetTick Marks for Depr Lead SheetWP#5630 - Depre Exp TestingReady