Chapter 8 Assignment

1. This question contains three items that are management assertions about property and
equipment. Following them are several substantive procedures for obtaining evidence
about management’s assertions.

Assertions
1. The entity has legal right to property and equipment acquired during the year.
2. Recorded property and equipment represent assets that actually exist at the balance-sheet
date.
3. Net property and equipment are properly valued at the balance-sheet date.

Substantive Procedures
a. Trace opening balances in the summary schedules to the prior-year audit documentation.
b. Review the provision for depreciation expense and determine whether depreciable lives and
methods used in the current year are consistent with those used in the prior year.
c. Determine whether the responsibility for maintaining the property and equipment records is
separated from the responsibility for custody of property and equipment.
d. Examine deeds and title insurance certificates.
e. Perform cutoff tests to verify that property and equipment additions are recorded in the
proper period.
f. Determine whether property and equipment are adequately insured.
g. Physically examine all major property and equipment additions.

Required:
For each of the three assertions (1, 2, and 3), select the one best substantive audit procedure (a–
g) for obtaining competent evidence. A procedure may be selected only once or not at all.

Substantive
Assertions Procedure
1. The entity has legal right to property and equipment acquired during the year. D
2. Recorded property and equipment represent assets that actually exist at the G
balance-sheet date.
3. Net property and equipment are properly valued at the balance-sheet date. B
 2. Following are the four assertions about account balances that can be applied to the audit
of a company’s PP&E, including assets the company has constructed itself: existence,
rights and obligations, completeness, and valuation and allocation.

Required:
For each of the following substantive procedures, (1) cite one assertion most closely related to
the evidence the procedure will produce (the primary assertion) and (2) when appropriate, cite
one or more other assertions that also are related to the evidence the procedure will produce—
the secondary assertion(s).

Substantive procedures Assertions

a.For major amounts charged to PP&E and a sample of smaller charges, Valuation, Existence
examine supporting documentation for expenditure amounts, budgetary
approvals, and capital work orders.
b.For a sample of capitalized PP&E, examine construction work orders in Valuation
detail.
c.For a sample of construction work orders, vouch time and material Valuation
charges to supporting payroll and material usage records. Review the
reasonableness of the hours worked, the work description, and the
material used.
d.Evaluate the policy and procedures for allocating overhead to the work Valuation and Allocation
orders and recalculate their application.
e.Determine whether corresponding retirements of replaced PP&E have Existence
occurred and have been properly entered in the detail records.
f. Select major additions for the year and a random sample of other Existence
additions and inspect the physical assets.
g.Vouch a sample of charges in the Repairs account and determine whether Completeness
they are proper repairs, not capital items.
h.Review the useful lives, depreciation methods, and salvage values for Valuation and Allocation
reasonableness. Recalculate depreciation.
i. Study loan documents for terms and security of loans obtained for Rights and Obligations
purchase of PP&E.
j. Inspect title documents for automotive and real estate assets. Rights
k.Analyze the productive economic use of PP&E to determine whether any Valuation
other- than-temporary impairment is evident.
 3. Bart's Company has prepared the PP&E and depreciation schedule shown in Exhibit 8.46.1 below.
The following information is available (assume the beginning balance has been audited):
• The land was purchased eight years ago when building 1 was erected. The location was then remote but now is
bordered by a major freeway. The appraised value of the land is $35 million.
• Building 1 has an estimated useful life of 35 years and no residual value.
• Building 2 was built by a local contractor this year. It also has an estimated useful life of 35 years and no
residual value. The company occupied it on May 1 this year.
• Computer A system was purchased January 1 six years ago when the estimated useful life was eight years with
no residual value. It was sold on May 1 for $500,000.

• Computer B system was placed in operation as soon as Computer A system was sold. It is estimated to be in use
for six years with no residual value at the end.
• The company estimated the useful life of the press at 20 years with no residual value.
• Auto 1 was sold during the year for $1,000.
• Auto 2 was purchased on July 1. The company expects to use it five years and then sell it for $2,000.
• All depreciation is calculated on the straight-line method using months of service.
Required:
a. Verify the depreciation calculations. Are there any errors? Put the errors in the form of an adjusting journal
entry, assuming that 90 percent of the depreciation on the buildings and the press has been charged to Cost of
Goods Sold and 10 percent is still capitalized in the inventory, and the other depreciation expense is classified as
General and Administrative Expense (i.e., building and press depreciation is considered a product cost;
inventory on hand includes 10 percent of the depreciation expense for buildings and the press: $180,700; Cost of
Goods Sold contains the other 90 percent: $1,626,300). (In cases where no entry is required, please select the
option "No adjusting journal entry required" for your answer to grade correctly. Leave no cells blank -
be certain to enter "0" wherever required. Do not round intermediate calculations. Round your answers
to the nearest whole dollar amount. Enter your answers in dollars and not in millions of dollars. Omit the
"$" sign in your response.)
General Journal Debit Credit
Accumulated Depreciation 269,000
Cost of Goods Sold 67,500
Inventory 7,500
General and Admit Expense 194,000

(a) The Computer B system is depreciated for a full year ($583,000), but depreciation should be calculated for
only 8 months. Correct amount is $389,000.

The depreciation on the Press should be $75,000 instead of $150,000. Somebody doubled the
depreciation expense for this year.