Question

A parent company sells equipment to its subsidiary on January 1, 2012 for $100,000. At the time, the equipment was reported on the parent's books at an original cost of $85,000 and accumulated depreciation of $25,000. The remaining life of the equipment as of January 1, 2012 is six years, and straight-line depreciation, no residual value is used. At what net value should this equipment be reported on a December 31, 2013 consolidated balance sheet?

Answer 1

When detection risk is low, an auditor usually scans bank reconciliations and tests items on a sample basis, signifying confidence in the company's internal financial controls and the accuracy of their financial statements.

Step-by-step explanation:

When detection risk is low, an auditor is likely to scan bank reconciliations and test items on bank reconciliations on a sample basis. Detection risk is the risk that the auditor will not detect a material misstatement in the financial statements. If this risk is low, it indicates that the auditor has confidence in the client's internal controls and the accuracy of their financial statements. Therefore, the auditor might employ less rigorous substantive testing because the risk of finding material misstatements is deemed to be lower. This approach is more efficient and cost-effective compared to full-scale testing of all transactions.

Bank reconciliations are an important control mechanism that ensures the amounts on a company's books match the actual cash amounts in its bank accounts. A lower detection risk would mean that the auditor might not need to perform full reconciliation themselves or confirm bank balances directly with external parties, such as the Federal Deposit Insurance Corporation, as they would consider existing client controls to be reliable.