ACCOUNTING MAJOR – AUDIT CASE (AUDITING THE FINANCING/INVESTING PROCESS : VARIOUS ASSET ACCOUNTS
Gonzales, CPA, is the auditor for a manufacturing company with a balance sheet that includes the entry “Property, plant, and equipment.” Gonzales has been asked by the company’s management if audit adjustments or reclassifications are required for the following material items that have been included in or excluded from “Property, plant, and equipment”:
1. A tract of land was acquired during the year. The land is to be the future site of the client’s new headquarters, which will be constructed next year. Commissions were paid to the real estate agent used to acquire the land, and expenditures were made to relocate the previous owner’s equipment. These commissions and expenditures were expensed and are excluded from “Property, plant, and equipment.”
2. Clearing costs were incurred to ready the land for construction. These costs were included in “Property, plant, and equipment.”
3. During the land-clearing process, timber and gravel were recovered and sold. The proceeds from the sale were recorded as other income and are excluded from “Property, plant, and equipment.”
4. A group of machines was purchased under a royalty agreement that provides royalty payments based on units of production from the machines. The costs of the machines, freight costs, unloading charges, and royalty payments were capitalized and are included in “Property, plant, and equipment.
Required (THE QUESTIONS) :
a. Describe the general characteristics of assets, such as land, buildings, improvements, machinery, equipment, fixtures, and so on, that should normally be classified as “Property, plant, and equipment,” and identify assertions in connection with the examination of “Property, plant, and equipment.” Do not discuss specific audit procedures.
b. Indicate whether each of the items numbered 1 to 4 requires one or more audit adjustments or reclassifications, and explain why such adjustments or reclassifications are required or not required. Organize your answer as follows:
| Item Number | Is Auditing Adjustment or Reclassification Required? (Yes or No) | Reason Why Audit Adjustments or Reclassification Are Required or not Required |
| ……….. | …………………………………………… | ……………………………………………………….. |
EXPERT ANSWER
a. General characteristics of assets:-
(1) that they are acquired for use in operations and not for resale,
(2) that they are long-term in nature and usually subject to depreciation, and
(3) that they have physical substance.
Identify assertions in connection with the examination of “Property, plant, and equipment:-
1. Trace from fixed assets to the property, plant and equipment subsidiary ledger- to determine that the assets are recorded.
2. Reconcile the property, plant and equipment subsidiary ledger with the general ledger- to determine that the accounting for property, plant and equipment transactions was consistent.
3. Vouch from the property,plant and equipment subsidiary ledger to the fixed assets- to determine that the assets actually exist.
b. Audit adjustments or reclassifications:-
| Item Number | Is Auditing Adjustment or Reclassification Required? (Yes or No) | Reason Why Audit Adjustments or Reclassification Are Required or not Required |
| 1. | Yes | The real estate agent was paid and there was relocations payments it need to be set up for cost that directly attributed the conditioning that would be included in property. |
| 2. | No | That cost was associated with the acquisition of the land therefore it was handled properly. |
| 3. | Yes | Clearing cost are cost to the land, and the revenue that was generated should reduce the cost of the land not treated as other income. |
| 4. | Yes | These expenses should be classified as expenses as they accure in the machinery cost , other than royalty payments. |