Audit Evidence and Conclusions for Various Fixed Asset Questions

Audit Evidence and Conclusions for Various Fixed Asset Questions
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.

 

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