The Man
After assessing control risk for the existence objective, the auditor decides whether it is necessary to verify the existence of individual items of manufacturing equipment included in the master file. If there is a high likelihood of material missing fixed assets still included in the master file, the auditor can select a sample from the master file and examine the actual assets. In rare cases, the auditor may decide it is necessary for the client to take a complete physical inventory of fixed assets to make sure they all exist. If a physical inventory is taken, the auditor normally observes the count.

The auditor normally does not need to test the accuracy or classification of fixed assets recorded in prior periods because, presumably, they were verified in previous audits at the time they were acquired. But the auditor should be aware that companies may occasionally have manufacturing equipment on hand that is no longer used in operations. If the amounts are material, the auditor should evaluate whether they should be written down to net realizable value (realizable value objective) or at least classified separately as “nonoperating equipment.”

In addition to performing procedures to obtain evidence related to balance-related audit objectives for fixed assets, auditors also perform audit procedures related to the four presentation and disclosure objectives for fixed assets. A major consideration in verifying disclosures related to fixed assets is the possibility of legal encumbrances. Auditors may use several methods to determine whether manufacturing equipment is encumbered, including:

Read the terms of loan and credit agreements
Mail loan confirmation requests to banks and other lending institutions
Have discussions with the client or send letters to legal counsel
The proper presentation and disclosure of manufacturing equipment in the financial statements must be evaluated carefully to make sure that GAAP is followed. Manufacturing equipment should include the gross cost and should ordinarily be separated from other fixed assets. Leased property should also be disclosed separately, and all liens on property must be included in the footnotes. Auditors must perform sufficient tests to verify that all four presentation and disclosure objectives are met.

VERIFY DEPRECIATION EXPENSE
Depreciation expense is one of the few expense accounts not verified as part of tests of controls and substantive tests of transactions. The recorded amounts are determined by internal allocations rather than by exchange transactions with outside parties. When depreciation expense is material, more tests of details of depreciation expense are required than for an account that has already been verified through tests

Get Your Essay

Cite this page

Depreciation Expense And Expense Accounts. (July 2, 2021). Retrieved from https://www.freeessays.education/depreciation-expense-and-expense-accounts-essay/