Question

A common error the auditor may find during the audit of property, plant, and equipment is that the client neglected to make a journal entry when disposing of an asset that has no value. When no consideration is received (for example, when the asset is donated or tossed out), it is easy to not record an entry and keep the asset on the books.

Clients often make an error by "forgetting" to record a disposal of assets that are discarded for no value. For example, technology can often become obsolete or without value, and clients may dispose of something when replacing it. The asset, however, stays on the books, which creates an overstatement of assets and overstated depreciation expense moving forward.

Read the case. Then answer the questions based on it.

As some assets, especially technology-related assets, become less valuable more quickly, clients may simply choose to discard the assets when replaced. However, because there is no consideration received, oftentimes clients will forget to record the entry removing the replaced asset from the books. As a result, as the new asset is recorded, the total assets are overstated, and, going forward, depreciation expense is also overstated as the disposed asset continues to be depreciated.

Very Best CPA is conducting a second-year audit on its client, Advanced Manufacturing, Inc. Consistent with the policy disclosed in the prior year financial statements, technology and computer equipment is depreciated over five years. During its first year audit, Very Best tested beginning balances and gained comfort on the Property, Plant, and Equipment balances. While auditing this year, the assistant controller offered to put a printer and scanner in the audit conference room since "they had so many extras lying around." In addition, he noted that most of the accounting personnel were printing to a new central station and everyone had a scanner on their desk. When auditing current year acquisitions, this seemed consistent with activity, as there were many technology purchases in the current year.

1. What should have first alerted Very Best that its audit approach possibly needed to be modified?

2. If Very Best's audit approach was modified, what is a potential audit procedure that can be added?

3. What additional observations could have alerted Very Best that its audit procedures needed to be modified?

Answer 1

In the current case, the CPA checked the initial adjusts of property, plant and gear during his first year of commitment. Presently during his subsequent year, he goes over certain things which may expect him to change his review systems.

Part 1.

At the point when the associate controller expressed that "they had such a large number of additional items lying around", the CPA would have realized that numerous additional printers and the scanners are there in the organization. As the organization isn't a misfortune making endeavor or scaling down, there is no purpose behind this to occur, other than that the organization has bought new printing and examining hardware.

Thus, numerous old printers and scanners have gotten out of date and now are lying around being pointless.

Additionally, as the CPA would have entered the customer office and had introductory conversations with the administration, before beginning of the review strategies, he would have seen the numerous scanners on every representative's work area, yet no printer. That also have cautioned the CPA with respect to the organization's difference in hardware use.

Part 2.

Presently, as the organization has bought numerous new gear, the review technique which can be included are:

• Verify the physical gear with the solicitations being entered in the framework
• The sensibility of the new buys
• The treatment of the old gear, regardless of whether disposed of and discounted from the books or not
• The cost booked in the benefit and misfortune account, for the gear lying around the workplace, yet with no utilization and scrap esteem left
• As the organization has rolled out numerous improvements with the benefits of the organization, physical check of the advantages ought to be certainly considered in the review program

Part 3.

The cost in regards to the new gear in the financials would have furnished the CPA with the data that organization has brought about costs on the new hardware.

The expanded devaluation cost would have raised the doubt.

The conversations with the administration about the general working of the organization and the advancement of the organization would have featured this point in the discussion.

Other than this, irregular voyage through the workplace and conversations with not many of the representatives would have featured this act of the organization to the examiner.