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13-2
McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Audit Approach—Current AccountsVersus Noncurrent Account
Cash
Securities
Accounts Receivable
Inventories
Accrued Liabilities
Accounts Payable
Short-Term Notes
Property, Plant & Equipment
Intangible Assets
Long-Term Liabilities
Owner’s Equity Accounts
High turnover accounts
Audit approach—audit the balance
Low turnover accounts
Audit approach—audit the changesin the accounts
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McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Controls Over Plant and Equipment
Use of a plant and equipment (capital budget) Maintenance of a subsidiary ledger A system of authorizations Analysis of variances from budgeted expenditures A statement of policy distinguishing between capital and
revenue expenditures A requirement that purchases of plant and equipment are
subjected to normal purchasing procedures Periodic physical inventories A system of retirement authorization and documentation
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McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Objectives for the Audit of Property, Plant and Equipment
1. Use the understanding of the client and its environment to consider inherent risk, including fraud risks, related to property, plant, and equipment.
2. Obtain an understanding of internal control over property, plant, and equipment.
3. Assess the risks of material misstatement and design tests of controls and substantive procedures that:
a.Substantiate the existence of property, plant, and equipment
b.Establish the completeness of recorded property, plant, and equipment
c.Verify the cutoff of transactions affecting property, plant, and equipment
d.Determine that the client has rights to recorded property, plant, and equipment
e.Establish the proper valuation or allocation of property, plant, and equipment and the accuracy of transactions affecting property, plant, and equipment
f.Determine that the presentation and disclosure of property, plant, and equipment are appropriate
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McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Substantive Tests of Property, Plant, and Equipment
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McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Impairment of Long-Lived Assets
Long-lived assets must be reviewed for impairment whenever events or changes in circumstances indicate that carrying value may not be recoverable
Test involves projecting future cash flows If impairment is indicated by cash flows
asset must be written down to fair value May require the use of a valuation
specialist
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McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Audit of Intangibles
Assets with definite useful lives are audited similar to property, plant and equipment
Assets with indefinite useful lives (e.g., goodwill) must be tested for impairment
Auditors generally rely on business valuation specialists to value goodwill for tests of impairment