Audit Conclusions or Situations
1. The choice of eight years for straight-line depreciation of the company's trucks appears unreasonable. I would suggest that the client change to a six-year life and use DDB depreciation.
2. Insurance coverage appears to be inadequate, because the client has chosen to carry only liability insurance on the cement trucks. There is no provision for collision or damage done to the trucks.
3. The client acquired a substantial piece of real estate from the town of Baraboo to build a warehouse in the town's new industrial complex. The land was donated to the company provided it maintains operations for a minimum of ten years and pays real estate taxes on its appraised value. The land is carried on the books at the fair market value at the time of donation of $250,000.
4. Several pieces of idle equipment were noted. It is recommended that the equipment be written down to the scrap value of $50,000 from the current net book value of $185,000.
5. The company has self-constructed the warehouse located in the town of Baraboo. It has capitalized all payroll expense directly related to construction of the project. The adjusting entry debited Building for $73,000 and credited Payroll Expense for the same amount.
6. The company completely overhauled ten of its trucks at a significant cost. The overhaul should extend the life of the trucks by at least three years. Because the company performs similar overhauls each year, the cost has been properly charged to repairs and maintenance.
7. The company sold 15 of its old trucks to Virgin Distributors, a new company owned by the brother of the company's chief executive officer. The equipment was old, and a gain of $70,000 on the sale was credited to income.
a. For each conclusion or situation listed, identify the type of audit evidence needed to support the auditor's conclusion.
b. Briefly indicate the audit implications if the auditor's conclusion is justified.
First, a reminder of the two type of audit evidence: that which is contained in the books and records of the company, and second, that which is corroborating information to validate the underlying data.
1. The auditor's opinion should be corroborated with an understanding of industry characteristics, IRS class life tables, and a review of the actual useful lives taken from the company records. A change could be cause for a prior period correction for an accounting change. The auditor would have to consider the retrospective amount of the change.
2. The auditor did not draw a conclusion because of insufficient information. Again, industry information could provide data for the auditor to assess the risk for the position taken. A schedule comparing costs of additional insurance to ...
The solution explains why the auditor may have been hasty in the conclusions drawn and suggests gathering additional audit evidence to support the conclusions, if that is possible. Where needed, corroborative evidence may be necessary to more fully understand the audit issue.