Connect Access Card for Principles of Auditing & Other Assurance Services
21st Edition
ISBN: 9781260299366
Author: Ray Whittington, Kurt Pany
Publisher: McGraw-Hill Education
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Chapter 13, Problem 34BOQ
To determine
Identify the appropriate answer related to the explanation which impacts the significant debits to the
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Required (kindly explain answers):
1. Why is it necessary to examine the lapsing schedule for additions and disposals of property, plant and equipment?
2. How do auditors test the reasonableness of the estimates used in relation to PPE (e.g. depreciation method, useful life, residual value?)
3. What are the procedures involved in determining the reasonableness of the depreciation expense during the year?
(Change in Estimate) Mike Crane is an audit senior of a large public accounting firm who has just been assigned to the Frost Corporation’s annual audit engagement. Frost has been a client of Crane’s firm for many years. Frost is a fastgrowing business in the commercial construction industry. In reviewing the fixed asset ledger, Crane discovered a series of unusual accounting changes, in which the useful lives of assets, depreciated using the straight-line method, were substantially lowered near the midpoint of the original estimate. For example, the useful life of one dump truck was changed from 10 to 6 years during its fifth year of service. Upon further investigation, Mike was told by Kevin James, Frost’s accounting manager, “I don’t really see your problem. After all, it’s perfectly legal to change an accounting estimate. Besides, our CEO likes to see big earnings!”InstructionsAnswer the following questions.(a) What are the ethical issues concerning Frost’s practice of changing the…
The audit senior has asked you to perform analytical procedures to obtain substantive evidence on the reasonableness of recorded depreciation expense of the delivery equipment of a client. Changes in the account occurred pretty much evenly during the year. The estimated useful life is six years. Estimated salvage value is 10% of original cost. Straight-line depreciation is used. Additional information includes:
Delivery Equipment (per General Ledger)
Beginning Balance $380,500
Additions 154,000
Disposals (95,600)
Ending Balance $438,900 Current year depreciation expense per books = $60,500.
Based on this information, develop an expectation of the amount of depreciation expense for the year as part of a reasonableness test. Does the recorded depreciation expense seem acceptable? Explain. What is the impact of the result of this analytical procedure on other substantive procedures that the auditor may perform?
Chapter 13 Solutions
Connect Access Card for Principles of Auditing & Other Assurance Services
Ch. 13 - Prob. 1RQCh. 13 - K-J Corporation has current assets of 5 million...Ch. 13 - Prob. 3RQCh. 13 - Prob. 4RQCh. 13 - Explain the use of a system of authorizations for...Ch. 13 - Moultrie Company discovered recently that a number...Ch. 13 - Does a failure to record the retirement of...Ch. 13 - Prob. 8RQCh. 13 - Prob. 9RQCh. 13 - Prob. 10RQ
Ch. 13 - Prob. 11RQCh. 13 - Prob. 12RQCh. 13 - Prob. 13RQCh. 13 - Prob. 14RQCh. 13 - Prob. 15RQCh. 13 - Gibson Manufacturing Company acquired new factory...Ch. 13 - Prob. 17RQCh. 13 - Do the auditors question the service lives adopted...Ch. 13 - Prob. 19RQCh. 13 - Explain how the existence of lease agreements may...Ch. 13 - Prob. 21RQCh. 13 - Prob. 22QRACh. 13 - Prob. 23QRACh. 13 - Gruen Corporation is a large diversified company...Ch. 13 - Prob. 25QRACh. 13 - Prob. 26QRACh. 13 - Prob. 27QRACh. 13 - Prob. 28QRACh. 13 - Prob. 29QRACh. 13 - Prob. 30QRACh. 13 - Prob. 31QRACh. 13 - To assure accountability for fixed-asset...Ch. 13 - Prob. 32BOQCh. 13 - Which of the following is an internal control...Ch. 13 - Which of the following accounts should be reviewed...Ch. 13 - Prob. 32EOQCh. 13 - Prob. 32FOQCh. 13 - Which of the following statements is not typical...Ch. 13 - Prob. 32HOQCh. 13 - Prob. 32IOQCh. 13 - An effective procedure for identifying unrecorded...Ch. 13 - Which of the following is not an overall test of...Ch. 13 - Prob. 32LOQCh. 13 - Prob. 33OQCh. 13 - Analysis of which account is least likely to...Ch. 13 - Prob. 34BOQCh. 13 - Prob. 34COQCh. 13 - Prob. 34DOQCh. 13 - A search for overstated property, plant, and...Ch. 13 - The following are typical questions that might...Ch. 13 - Prob. 36PCh. 13 - Prob. 37PCh. 13 - Chem-Lite, Inc., maintains its accounts on the...Ch. 13 - Prob. 39PCh. 13 - You are reviewing the property, plant, and...
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- There are various types of accounting changes, each of which is required to be reported differently.Required:1. What type of accounting change is a change from the sum-of-the-years’-digits method of depreciation to thestraight-line method for previously recorded assets as a result of new information related to production patterns? Under what circumstances does this type of accounting change occur?2. What type of accounting change is a change in the expected service life of an asset arising because of moreexperience with the asset? Under what circumstances does this type of accounting change occur?arrow_forwardThe audit senior has asked out to perform analytical procedures to obtain substantive evidence on the reasonableness of recorded depreciation expense of the delivery vehicles of a client. Changes in the account occurred pretty much evenly during the year. The estimated useful life is six years. Estimated salvage value is 10% of original cost. Straight-line depreciation is used. Additional information Delivery equipment per general ledger shows: Beginning balance = 380,500 Additions = 154,000 Disposals = (95,600) Ending balance = 438,900 Current year depreciation expense per books = P60,500 Based on this information, estimate the amount of depreciation expense for the year using analytical procedures. Does the recorded depreciation expense seem acceptable? Explain What is the impact of the result of this analytical procedure on other substantive procedures that the auditor may perform?arrow_forwardMike Crane is an audit senior of a large public accounting firm who has just been assigned to the Frost Corporation's annual audit engagement. Frost has been a client of Crane's firm for many years. Frost is a fast-growing business in the commercial construction industry. In reviewing the fixed asset ledger, Crane discovered a series of unusual accounting changes, in which the useful lives of assets, depreciated using the straight-line method, were substantially lowered near the midpoint of the original estimate. For example, the useful life of one dump truck was changed from 10 to 6 years during its fifth year of service. Upon further investigation, Mike was told by Kevin James, Frost's accounting manager, “I don't really see your problem. After all, it's perfectly legal to change an accounting estimate. Besides, our CEO likes to see big earnings!” Instructions Answer the following questions. a. What are the ethical issues concerning Frost's practice of changing the useful lives of…arrow_forward
- The client has changed from double declining balance to straight line depreciation for its equipment. The effect on this year’s income is material, and no information is disclosed in footnotes related to the change. You believed the change aligns with change in usage pattern of the equipment, except that adequate disclosure is made relating to the change of depreciation method after your advice, will your opinion be different? Q) Discuss the most appropriate type of opinion the auditor should issue. Explain briefly the reason for the opinion.arrow_forwardIt is assumed that this year the company also changed the location of the production line to a new factory. One of the conditions that allows production in the new factory is that company must, at the end of the useful life of factory, dismantle the factory and repair any environmental damage caused to the land on which it is situated. Require: For this information, identify the audit risk to be consider in planning audit and audit procedures to response these risk.arrow_forwardIndicate how the following items are recorded in the accounting records in the current year of Coronet Co. a. Impairment of goodwill. b. A change in depreciating plant assets from accelerated to the straight-line method. c. Large write-off of inventories because of obsolescence. d. Change from the cash basis to accrual basis of accounting. e. Change from LIFO to FIFO method for inventory valuation purposes. f. Change in the estimate of service lives for plant assets.arrow_forward
- Which of the following statements about depreciation is false?: Depreciation does not apply to most buildings because their usefulness and revenue producing ability generally remain intact over time. Recording depreciation in each period is an application of the expense recognition (matching) principle. Depreciation is required because of wear-and-tear and technological obsolescence. The balance in accumulated depreciation represents the total cost that has been charged to expense since placing an asset in service.arrow_forwardAn annual report of Costco Wholesale Corporation, the large discount company, contained the following statement:“The Company periodically evaluates long-lived assets for impairment when circumstances occur that may indicate the carrying amount of the asset group may not be fully recoverable”. Why would the concept of impairment be referred to as a conservative accounting approach?arrow_forwardIn testing for unrecorded retirements of equipment, an auditor might not Select items of equipment from the accounting records and then attempt to locate them during the plant tour. Compare depreciation expense with the prior year's depreciation expense. Trace equipment items observed during the plant tour to the equipment subsidiary ledger. Scan the general journal for unusual equipment retirements.arrow_forward
- A weakness in internal control over recording purchased equipment may cause the auditor to: a. Review the subsidiary ledger to ascertain whether depreciation was taken on each item of equipment during the year. b. Inspect certain items of equipment in the plant and trace those items to the accounting records. c. Trace additions to the "other assets" account to search for equipment that is still on hand but no longer being used. d. Select certain items of equipment from the accounting records and locate them in the plant. e. Review salvage value estimates for reasonableness.arrow_forwardYou were requested to personally deliver your auditor’s report to the board of directors of Sebal Manufacturing Corporation and answer questions posed about the financial statements. While reading the statements, one director asked what are the precise meanings of the terms cost, expense, and loss? These terms seem sometimes to identify similar items and other times dissimilar items.”book value of the component’s net assets. The component was operating at a loss from the beginning of the year. in addition, Lynn had one of its manufacturing plants destroyed by an earthquake during the year. Earthquakes are not uncommon in Lynn’s operating environment. 1. Explain how Lynn should report discoutinued operations of a component of its business on its income statement for this year. Do not discuss earnings per share requirements. 2. Explain how Lynn…arrow_forwardidentify whether it is treated as a prior period adjustment or change in accounting estimate. After using an expected useful life of seven years and no salvage value to depreciate its office equipment over the preceding three years, the company decided early this year that the equipment will last only two more years.arrow_forward
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