Answered: audit risk

Business

Accounting

audit risk

Auditing: A Risk Based-Approach (MindTap Course List)

11th Edition

ISBN:9781337619455

Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Publisher:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Chapter12: Auditing Long-lived Assets And Merger And Acquisition Activity

Section: Chapter Questions

Problem 22RQSC

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During the audit of Company XYZ, John Doe, the plant manager tells you that the company purchased and an equipment at the beginning of the year that is currently being used in the factory. The equipment was recorded at cost. The manager asks you, now that we are using the machine in our production do we need to any additional accounting for the machine? Using the related GAAP and prepare a memo to the president that summarizes how to record, and the machine used in the factory.
In testing for unrecorded retirements of equipment, an auditor might not Select items of equipment from the accounting records and then attempt to locate them during the plant tour. Compare depreciation expense with the prior year's depreciation expense. Trace equipment items observed during the plant tour to the equipment subsidiary ledger. Scan the general journal for unusual equipment retirements.
In reviewing of subsequent events, you learned of heavy damage to the client’s warehouse due to a fire occurred after year-end. The loss will partly be reimbursed by insurance. The newspaper described the event in detail. The client made adjustment to related inventories and buildings to reflect the loss. Assume im a auditor, and I am giving opinion. Since the client made adjustments to related inventories and buildings to reflect the loss after a heavy damage. However, it is a non-adjustable subsequent event, the company is not supposed to adjust the entries. Also, they haven’t claimed to make any footnotes to explain the crisis, which is inadequately disclosed, which both are accounting disagreements, since it is heavy damage, so both are supposed to be highly material, so adverse opinions should be issued. If the client did disclose the footnotes to explain the crisis, adverse opinions with explanatory opinion should be issued. Is adverse opinion with explanatory paragraph…
Production at the Paint Company’s factory was halted for one day when a truck carrying dye used in the production process overturned in the Rio Bobre River causing the contamination to the water supply system in the area. The Environmental Agency is currently considering whether the release of dye was in breach of environmental legislation. The company’s insurers have not yet commented on the event. Assume that the date is now 20 December 2019, the financial statements and the audit report have just been signed and the report is to be presented to the Board of Directors on 10 January 2020. The Environmental Agency has issued a report stating that Paint Company is in breach of environmental legislation and a fine of $10.5M will now be levied on the company. The amount is material to the financial statements. Required: Explain the additional audit work the auditor should carry out in respect of this fine. The auditors are considering to modify their audit opinion. Do you agree or…
2. XYZ is conducting an audit of the property, plant, and equipment records of AQA Corporation. XYZ selected two specific assets for closer inspection. XYZ has examined documentation related to each asset's original purchase and compared it to the recorded cost, physically inspected the item to determine that it is still in the possession of the company and conducted other similar assurance procedures. The final step in the audit of these accounts is to test the calculations of depreciation expense and accumulated depreciation. XYZ has asked you to perform this final procedure for 2018. Below is a schedule of the two assets, with the depreciation values determined by AQA. The building was depreciated by the straight-line method, and the truck by the double-declining balance method. Determine if the indicated depreciation values are correct. Item Cost Purchase Service Salvage Value Depreciation Expense for Accumulated Date Life Depreciation at 2018 12/31/18 Building RO 1,200,000 July 1,…
Juventus Motor Cars Co (Juventus) manufactures a range of motor cars and its year end is 30 June 2019. You are the assistant audit manager of Milan & Co and are currently preparing the audit programmes for the year-end audit of Juventus. You have had a meeting with your audit manager and he has notified you of the following issues identified during the audit risk assessment process: 1. Land and buildingsJuventus has a policy of revaluing land and buildings, this is undertaken on a rolling basis over a five-year period. During the year Juventus requested an external independent valuer to revalue a number of properties, including a warehouse purchased in January 2019. Depreciation is charged on a straight line basis. Question:Describe the substantive audit procedures the auditor should perform to obtain sufficient and appropriate audit evidence in relation to:(i) The land and buildings and the recently purchased warehouse.
For each of the following misstatements in property, plant, andequipment accounts, state an internal control that the client can implement to preventthe misstatement from occurring and a substantive audit procedure that the auditor canuse to discover the misstatement:1. Computer equipment that is abandoned or traded for replacement equipment isnot removed from the accounting records.2. Depreciation expense for manufacturing operations is charged to administrativeexpenses.3. The asset lives used to depreciate equipment are less than reasonable, expected useful lives.4. Capitalizable assets are routinely expensed as repairs and maintenance, perishabletools, or supplies expense.5. Acquisitions of property are recorded at incorrect amounts.6. A loan against existing equipment is not recorded in the accounting records. Thecash receipts from the loan never reached the company because they were used forthe down payment on a piece of equipment now being used as an operating asset. Theequipment…
In testing for unrecorded retirements of equipment, an auditor might not. a. Select items of equipment from the accounting records and then attempt to locate them during the plant tour. b. Compare depreciation expense with the prior year's depreciation expense. c. Trace equipment items observed during the plant tour to the equipment subsidiary ledger. d. Scan the general journal for unusual equipment retirements.
Please solve all questions. You are the manager responsible for the audit of Kicap Manis Berhad, a listed company, for the year ended 31 December 2019. The main business activity of Kicap Manis Berhad is the manufacture of farm machinery. The audit work has been completed, and you are reviewing the working papers in order to draft a report to those charged with governance. During the audit of property, plant and equipment (PPE), the audit team found no material misstatement but the following issues have come to your attention. It was discovered that authorization had not been gained for the purchase of office equipment with a cost of RM315,000. The officer in charge of the purchase claimed that the management has conveyed their agreement with the purchase in the management team monthly meeting, but the audit team has not been furnished with such minutes of meeting even after numerous requests. The client is using an internally developed PPE system, PropertyCare, to maintain the…
Which of the following controls will most likely justify a reduced assessed level ofcontrol risk for the existence assertion for equipment?(1) Internal auditors periodically select equipment items in the fixed assets masterfile and locate the related equipment on company premises.(2) Department heads are asked to provide information to the accounting department each quarter about any equipment no longer in use or somewhat damaged.(3) All contracts of equipment purchases are reviewed by both the controller andattorney to verify that legal title transfers to the client and that none representoperating leases.(4) As part of quarterly and annual inventory physical counts, factory equipment islisted and subsequently reconciled to the fixed asset master file.
The Environmental Protection Agency (EPA) is in the process of investigating a possible water contamination issue at the manufacturing facility of Northwest Forest Products. The EPA has not yet proposed a penalty assessment. Management feels an assessment is reasonably possible, and if an assessment is made, an unfavorable settlement is estimated between $20 and $30 million. How should Northwest Forest Products report this situation in its current financial statements?
1. In November of the current year, an automobile manufacturing company recalled all pickup trucks manufactured during the past two years. A flaw in the battery cable was discovered and the recall provides for replacement of the defective cables. The estimated cost of this recall is $3.7 million. 2. The EPA has notified a company of violations of environmental laws relating to hazardous waste. These actions seek cleanup costs penalties, and damages to property. The company is reasonably certain there will be cost associated with the cleanup, but cannot estimate the amount. The cleanup cost could be as high as $4,170,000 or as little as $670,000 and insurance could reimburse all o part of the cost. There is no way to more accurately estimate the cost to the company at this time. 3. Holland Company does not carry property damage insurance because of the cost. The company has suffered substantial losses each of the past three years. However, it has had no losses for the current year.…