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Audit Evidence and Conclusion

13-33 (Audit Evidence and Conclusions) The following conclusions were taken from a staff auditor's summary worksheet for fixed assets and the worksheet for prepaid
insurance.

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 $185,000.13-33 (Audit Evidence and Conclusions) The following conclusions were taken from a staff auditor's summary worksheet for fixed assets and the worksheet for prepaid
insurance.

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.

Required
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.

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.

Required
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.

Attachments

Solution Preview

STEP 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."

The audit evidence needed to support the auditor's conclusion can include a statement from the manufacturer of the company's trucks about the expected life of the trucks. Otherwise, there can be a written statement from an expert (independent and external) about the expected life of the trucks.

The audit implications are that the company is should spread its depreciation over a shorter period of time. The real implication of this is that the current income as disclosed by the income statement will be lower than that disclosed in the income statement.

STEP 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".

The audit evidence needed to support the auditor's conclusion can include a statement from the truck drivers about the chances of collusion or damage to trucks. In addition, the auditor can physically examine the trucks in use and if signs of collusion or damage are found on the trucks, an independent truck repairer can document them. However, the best audit evidence possible is the existence of bills and receipts relating to repairing trucks involved in collusion.

The audit implications if the conclusion is justified are that the ...

Solution Summary

This posting gives the audit evidence required for the different situations and the conclusion that has been reached. The situations are varied and give an excellent idea of real life problems.

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