Question

Tennessee Company violated company policy by erroneously capitalizing the cost of painting its warehouse. The CPA examining Tennessee's financial statements would most likely learn of this error by:

A. examining in detail a sample of construction work orders.
B. discussing Tennessee's capitalization policies with its controller.
C. reviewing the titles and descriptions for all construction work orders issued during the year.
D. observing during the physical inventory observation that the warehouse has been painted.

Answer 1

A CPA would most likely find the error of capitalizing the cost of painting a warehouse by closely examining construction work orders, which would reveal whether expenses were recorded according to the company's capitalization policy.

Step-by-step explanation:

The CPA examining Tennessee's financial statements would most likely learn of the error of erroneously capitalizing the cost of painting its warehouse by examining in detail a sample of construction work orders. This would involve looking at the actual expenses recorded and checking if they align correctly with the company's capitalization policies. Since painting is typically a maintenance expense, capitalizing it as a capital expenditure is incorrect according to most accounting standards, and this error would commonly be spotted through detailed examination of work orders and related documentation.While discussing the capitalization policies with the controller or reviewing titles and descriptions of work orders might indicate the company's policy, this does not necessarily reveal the specific error made. Observing the painted warehouse only indicates that painting occurred and does not speak to how it was accounted for in the financial records.