Accounting Question

Property, Plant, & Equipment Acquisition ProcessPurchase Requisition
Reviewed
and
approved
Purchase Order
Purchase Order sent to Vendor
also sent to AP Dept, the dept w
receive the PPE, and corporate
asset accountant)
PPE received and
inspected
Receiving Report
Receiving Report sent to
AP Dept and corporate
fixed asset accountant.
Vendor Invoice Received
in AP Dept
Vendor Invoice
AP Dept sends the
invoice to corporate
fixed asset accountant
n Process
Workpaper
4000
MLP 12/2/2011
Purchase Order
Reviewed
and
approved
Purchase Order sent to Vendor (copies
also sent to AP Dept, the dept who will
receive the PPE, and corporate fixed
asset accountant)
Receiving Report sent to
AP Dept and corporate
fixed asset accountant.
AP Dept sends the
invoice to corporate
fixed asset accountant
Corporate
Fixed Asset
Accountant
inputs fixed
asset into
Fixed Asset
System
System
Property, Plant, & Equipment Acquisition Process Controls Testing Workpaper
Workpaper
4001
MLP 12/2/2011
Note – This working paper documents the results of our control testing over the Property, Plant, and Equipment acquisition process key
controls. Key controls over this process were provided by the client and did not change from the prior year. We also obtained the
acquisition process flowchart from J.M. Perkins, Controller, noting no changes in the process to acquire PPE from the prior year. See
working paper 4000 for the flowchart describing the acquisition process. We tested the key controls over the acquisition process as
documented below, noting no exceptions. As such, the control reliance strategy for testing PPE additions as documented at workpaper
1810 remains appropriate. See below for testing.
Testing – PPE101 and PPE102
Control #
PPE101
Control Description
Purchases of property, plant, and equipment are initiated through the use of a purchase requisition form which must be approved
by an authorized person depending on the dollar amount of the transaction
PPE102
Purchase orders for property, plant, and equipment must be approved by an authorized person prior to submission to a vendor.
Purchase
Selections
New Desks for Finance Dept
Sales Team Laptops
Requisition Form #
SZ-23879
SZ-23892
Purchase
Requisition Form
Date
2/5/2011
5/25/2011
Requisition
Amt
Sign-off?
15,500 Yes
18,000 Yes
P.O. #
P.O. Date
50124
50235
P.O. Amt
2/10/2011
5/28/2011
Testing – PPE103 and PPE104
Control Description
Each month, the property, plant, and equipment subsidiary ledger is reconciled to the general ledger and reviewed.
Each month, a detailed report of property, plant, and equipment acquisitions is reviewed by department supervisors to determine
whether assets acquired in each department for that quarter are properly included in the additions listing.
Control #
PPE103
PPE104
Selections
Februrary
September
Reconciliation
Examined?
Yes
Yes
Reconciliation
Sign-offs?
Yes
Yes
Detailed
Report of
Acquisitions
Examined?
Detailed
Report of
Acquisitions
Examined Sign-offs?
Tickmark
Yes
Yes
Yes
Yes
{b}
{b}
Sign-off? Tickmark
15,340 Yes
17,899 Yes
{a}
{a}
Tick Marks for Control Testing Workpaper
{a}
Kerzman and Lee determined that two selections for control testing was
sufficient due to the relative infrequency of PPE purchases made at Shoe Zoo
(see PPE Additions Listing for 2011). We made our selections for testing from
the PPE additions Listing as of 10/31/2011. We obtained the relevant purchase
requisition forms and purchase orders from the Accounts Payable Clerk, Ryan
Jones. We noted that both the requisition form and the PO were properly
approved according to Shoe Zoo, Inc.’s authorization policies. Based on our
testing, both PPE101 and PPE102 controls appear to be operating effectively.
{b}
Kerzman and Lee randomly selected two months for testing. The number of
selections was set based on the frequency of the control activity (monthly
reconciliation, monthly detailed report of property additions). We obtained
from the Controller, J.M. Perkins, the February and September PPE
reconciliations and detailed PPE additions reports.
We noted that each reconciliation was performed by the fixed asset
accountant, Mary Swanson, as indicated by her sign-off as “preparer” on the
reconciliation. We noted that the reconciliation was reviewed by J.M. Perkins,
Controller as indicated by his sign-off as “reviewer” on the reconciliation. We
noted that the reconciliation was properly performed and no unusual items
were noted. The sign-off dates indicate that the reconciliation was done in a
timely manner. Based on our examination, the control PPE103 appears to be
operating effectively.
We discussed the process for PPE104 with Mary Swanson, fixed asset
accountant. She noted that after each month-end, she runs a report of all PPE
additions for the month through the Fixed Asset System (FAS). She then pulls
supporting invoice packets for each addition and checks to see that each asset
was input into FAS correctly based on the type of asset, date acquired, etc. She
then coordinates with each department head responsible for each asset
addition. For example, on February 1, the company acquired computers for
the Marketing Dept. Therefore, she sent the detailed asset addition report for
February to the Marketing Dept. Head for his review. We noted that the
reports were signed off by Mary Swanson as “preparer” and initials were
provided by each department head next to the asset addition made to their
department. The department heads will inform Mary if they are aware of any
other additions in their department. Based on our review of the detailed asset
addition reports for February and September, this control appears to be
operating effectively.
{c}
{d}
{e}
{f}
{g}
Audit Program – Testing of Gross Property, Plant & Equipment
Step # Task to Be Performed
Assertion
Tested
1
Obtain and foot a trial balance from the client,
N/A
containing both the current year (12/31/2011) and
prior year (12/31/2010) balances.
2
Agree the prior year property balances listed in
the trial balance to the prior year audited balances
from the prior year financial statements.
3
Obtain a schedule of all changes in the property
accounts from the end of the prior year to the end
of the current year and test the schedule for
mathematical accuracy in all columns and rows.
4
Agree the beginning and ending balances per the
schedule of activity obtained in Step 3 to the prior
year and current year balances (12/31/2010 and
12/31/2011) per the trial balance.
5
Obtain a 2011 detailed Additions Listing from the
client. Test the mathematical accuracy of the
Additions Listing and agree the totals per the
Additions Listing to the schedule of activity
obtained in Step 3.
6
Calculate the required sample size and make
selections from the 2011 Additions Listing
obtained in Step 5 for testing.
7
Vouch a sample of 2011 property additions.
8
Test the physical existence of each selected 2011
addition.
Existence and
Valuation &
Allocation
Performed Work paper
by
References
MLP
2/7/2012
5610
MLP
2/7/2012
5615-A
Property Lead Sheet
Workpaper
5610
Initials/Date
Property, Plant & Equipment – Gross
Account #
Acct Description
12/31/11 Balance Tick Mark
12/31/10 Balance Tick Mark
100 Land
200 Building
300 Furniture & Fixtures
400 Computer
651,267
927,816
148,667
315,965
651,267
802,349
125,043
251,872
2,043,715
1,830,531
Total Gross Property
Tick Marks for Property Lead Sheet
{a}
{b}
{c}
{d}
{e}
{f}
{g}
Property Roll Forward
Property, Plant & Equipment – Gross
Workpaper
5615
Initials/Date
12/31/2010
Balance
2011
Additions
2011
Disposals
12/31/2011
Balance
Land
651,267
651,267
Building
802,349
203,564
Furniture & Fixtures
125,043
36,087
12,463
148,667
Computer
251,872
72,846
8,754
315,964
Total
1,830,531
312,497
21,217
2,121,811
1,005,913
Tick Marks for Property Roll Forward
{a}
{b}
{c}
{d}
{e}
{f}
{g}
Additions Testing Workpaper
Tick Marks/References
Workpaper
5615-A
Initials/Date
Balance to be tested for 2011 Additions
Balance per the Detailed Additions listing
Difference
Sample Size Calculated
2 {a}
Testing
Sample #
1
2
Subselected
Date
Asset
Amt
Added
Description
Invoice
Invoice # Invoice Date
Amount
Check #
Check
Date
Physical
Existence
Check Amt verified?
Tick Marks for Additions Testing Workpaper
{a}
{b}
{c}
{d}
{e}
{f}
{g}
Kerzman and Lee calculated the required sample size for 2011 additions
using the balance of the property additions, the materiality level described
at workpaper 1710, and the control reliance testing strategy described at
1810.
Audit Program – Testing of Depreciation Expense
Step # Task to Be Performed
Assertion
Tested
1
Obtain a trial balance from the client, containing N/A
both the current year (12/31/2011) and prior year
(12/31/2010) balances.
2
Agree the prior year depreciation expense balance
listed in the trial balance to the prior year audited
balance from the prior year working papers.
3
Perform substantive analytical procedures to test
depreciation expense for the year ended
12/31/2011.
Performed Work paper
by
References
MLP
2/7/2012
5625
Depreciation Expense Lead Sheet
Workpaper
5625
Initials/Date
Account #
Acct Description
12/31/11 Balance Tick Mark
12/31/10 Balance Tick Mark
7000 Depreciation Expense
65,949
62,397
Tick Marks for Depreciation Expense Lead Sheet Workpaper
{a}
{b}
{c}
{d}
{e}
{f}
{g}
Depreciation Expense Testing Workpaper
Workpaper
5630
Initials/Date
Note – In accordance with our substantive testing strategy described in workpaper 1810, Kerzman and Lee will
test 2011 depreciation expense using substantive analytical procedures. Based on our understanding of changes in
property, plant and equipment from the prior year to the current year, we will calculate an “expected balance” for
depreciation expense for 2011 based on the ratio of 2010 depreciation expense to the average PPE balance from
the 2010. Based on our assessment of risks in this account, materiality, and our professional judgment as
described at workpaper 1710, we set the threshold for further investigation at $1,000. See below for testing.
Calculation of Prior Year Ratio of Depreciation Expense to Prior Year Average Gross PPE
Tick Marks/References
2010 Recorded Depreciation Expense
Jan 1, 2010 Balance of Gross PPE
Dec 31, 2010 Balance of Gross PPE
1,687,023 PY
Average Balance of 2010 Gross PPE
2010 Depreciation Exp Divided by
Average Balance of 2010 Gross PPE
Calculation of Expected Current Year Depreciation
Jan 1, 2011 Balance of Gross PPE
Dec 31, 2011 Balance of Gross PPE
Average Balance of 2011 Gross PPE
2010 Depreciation Exp Ratio (calculated
above)
Expected 2011 Depreciation Expense
Actual 2011 Recorded Deprec. Expense
Difference
Predetermined Threshold for Tolerable
Difference
1,000
Tick Marks for Depreciation Expense Testing Workpaper
{a}
{b}
{c}
{d}
{e}
{f}
{g}
{h}
{i}
2011 Property Additions Listing
Date Acquired
Asset #
Asset Description
Asset Cost
Land
None
12/28/2011
4/27/2011
12/30/2011
1/6/2011
3/19/2011
3/19/2011
8/27/2011
10/4/2011
2/1/2011
4/5/2011
6/17/2011
6/29/2011
9/28/2011
4/6/2011
200-4
200-5
200-6
Building
Warehouse expansion
Factory cafeteria remodel
Office building Addition
107,653
17,814
78,097 √
300-28
300-29
300-30
300-31
300-32
Furniture & Fixtures
Chairs – cafeteria
New Desks for Finance Dept
Light Fixtures
Executive Conference Room Tables
Chairs – accounting offices
1,997
15,340
4,502
8,421
6,042
400-79
400-80
400-81
400-82
400-83
400-84
Computer
Printers for Marketing
Back-up System Drives
Sales Team Laptops
Desktop Computers
Copy/pdf Machine
Apple Computers for Marketing Dept
4,081
1,517
17,899
5,004
10,089
34,256 √
INVOICE
Computer Supply Inc.
For all of your computer needs!
Invoice No: 4290-Z24
Date: April 1, 2011
TO
Shoo Zoo, Inc.
5002 35th Street
My Town, GA 12345
QTY
17
ITEM #
1234
DESCRIPTION
Apple Computers
UNIT PRICE
LINE TOTAL
1,812.85
30,818.45
SUBTOTAL
30,818.45
Sales Tax
TOTAL
2,465.48
33,283.93
Make all checks payable to Computer Supply Inc.; 2094 1st Street; My Town, GA 12345
THANK YOU FOR YOUR BUSINESS!
INVOICE
Florida Builders Inc.
Florida Builders, Inc.
5789 Wabash Ave.
Sunny Town, FL 54321
Phone [(509) 555-0190] Fax [(509) 555-0191]
INVOICE #8765000-876E
DATE: DECEMBER 30, 2011
TO:
FOR:
Shoo Zoo, Inc.
1001 Main Street
Sunny Town, FL 54321
Building Expansion
DESCRIPTION
HOURS
RATE
Materials – Office Expansion
Labor – Office Expansion
AMOUNT
54,779.84
600
29.22
17,532.00
72,311.84
Make all checks payable to Florida
Builders, Inc.
SUBTOTAL
SALES TAX
5,784.95
TOTAL
THANK YOU FOR YOUR BUSINESS!
78,096.79
Shoe Zoo, Inc.
5002 35th St.
My Town, GA 12345
Check #100003
Date 4/10/2011
Pay to the Order of: Computer Supply, Inc.______________________________ $33,283.93
Thirty-three thousand two hundred eighty-three and 93/100 Dollars________________________
Invoice #4290-Z24
Memo
J. M. Perkins
_________________________
Shoe Zoo, Inc.
5002 35th St.
My Town, GA 12345
Check #100004
Date 4/10/2011
Pay to the Order of: Granny Smith Computer Repair___ _____________________ $972.10
Nine hundred seventy-two and 10/100 Dollars______________________________________
Invoice #356-A
Memo
J. M. Perkins
_________________________
Shoe Zoo, Inc.
5002 35th St.
My Town, GA 12345
Check #100548
Date 1/29/2012
Pay to the Order of: Florida Builders, Inc.________________________________ $78,096.79
Seventy-eight thousand and ninety-six and 79/100 Dollars_______________________________
J. M. Perkins
Invoice #8765000-876E
Memo
_______________________
Shoe Zoo, Inc. Fixed Asset Depreciation Policy
Revised January 26, 2008
Depreciation expense shall be recognized for all property, plant, and equipment (except land)
owned by Shoe Zoo, Inc. based on the straight-line method of depreciation over the estimated
useful life of each asset. Depreciation shall be automatically calculated monthly for each asset
through the use of a fixed asset software program (FAS). The subsidiary ledger for depreciation
expense generated by FAS shall post to the general ledger at the end of each month. The
corporate fixed asset accountant shall reconcile the general ledger for depreciation expense to
FAS reports each month.
Assets acquired during the first 15 days of a given month shall receive a full month of
depreciation expense in the month acquired. Assets acquired after the first 15 days of a given
month shall begin depreciation expense in the following month.
Shoe Zoo, Inc. has determined the following estimated useful lives for capital assets:
Estimated Useful Lives Based on the Type of Capital Asset
Building and Building Improvements – 20 years
Furniture and Fixtures – 7 years
Computers & Computer Equipment – 3 years
Prior Year Audited Financial Statements
SHOE ZOO, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
2010
Assets
Current Assets:
Cash and cash equivalents
$
Accounts receivable
472,013
103,544
Merchandise inventories
4,503,249
Prepaid Expenses
69,524
Prepaid Rent
25,103
Total Current Assets
5,173,433
Property and equipment-net
1,279,104
Total Assets
$
6,452,537
$
1,504,326
Liabilities and Shareholders’ Equity
Current Liabilities:
Accounts payable
Accrued and other liabilities
462,147
Total Current Liabilities
1,966,473
Total Liabilities
1,966,473
Shareholders’ Equity:
Common stock
3,048,752
Additional paid-in capital
200,567
Retained earnings
1,236,745
Total Shareholders’ Equity
4,486,064
Total Liabilities and Shareholders’ Equity
See notes to consolidated financial statements.
$
6,452,537
Prior Year Audited Financial Statements (Continued)
SHOE ZOO, INC.
EXCERPTS FROM NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 – Property and Equipment-Net
The following is a summary of property and equipment:
December 31,
2010
Land
$
651,267
Building
802,349
Furniture & Fixtures
125,043
Computer
251,872
Total
1,830,531
Less accumulated depreciation
(551,427)
Property and equipment – net
$
1,279,104
Selected Prior Year Working Papers
Depreciation Expense Lead Sheet
Workpaper
5625
BGB 2/13/2011
Account # Acct Description
7000 Depreciation Expense
12/31/10 Balance Tick Mark
62,397 5630
12/31/09 Balance Tick Mark
60,084 PY
2010 Property Additions Listing
Date Acquired
Asset #
Asset Description
Asset Cost
Land
None
9/8/2010
200-3
Building
Florida office remodel/expansion
1/27/2010
2/27/2010
5/4/2010
9/10/2010
300-22
300-23
300-24
300-25
9/20/2010
11/10/2010
300-26
300-27
Furniture & Fixtures
Break room sofas
Reception furniture
Florida office patio tables w/umbrellas
Florida office executive lounge chairs
Florida office executive lounge décor
(mirrors, art, etc.)
Chairs – human resources offices
400-75
400-76
400-77
400-78
Computer
Reception computer/printer
New server
Fax machine
New digital phone system – Florida office
2/27/2010
5/5/2010
6/30/2010
11/1/2010
100,053
4,731
21,479
9,922
5,004
4,765
4,989
3,525
51,575
5,224
25,333
CASE Shoe Zoo, Inc. ACCT 460 Spring, 2023
Introduction and Background
Shoe Zoo, Inc. was founded 20 years ago by a young entrepreneur interested in providing highfashion shoes to the public at an affordable price. What started as one small storefront in My
Town, GA has since expanded into a thriving business with 15 store locations in large cities
throughout the southeast region of the country and two office/distribution facilities. Shoe Zoo
owns the two office/distribution facilities and rents storefront space for their 15 locations in
popular indoor or outdoor malls. Over the past 20 years, Shoe Zoo has strived to maintain its
original goal, to provide brand name shoes for the whole family, including casual shoes, dressy
shoes, boots, sandals, and athletic shoes, at an affordable price. Shoe Zoo is a family owned
business; Kerzman and Lee LLP has audited Shoe Zoo’s financial statements for the last three
years. Over those three years, Shoe Zoo has consistently reported positive earnings and has had a
small but steady increase in revenues, consistent with the industry trend.
As a staff auditor with Kerzman and Lee LLP, you have been assigned to perform two tasks
related to the audit of Property, Plant, and Equipment (PPE) for Shoe Zoo, Inc.: perform
substantive detail testing of gross PPE additions and perform substantive analytical procedures to
test depreciation expense. There are three files that you will need to complete these tasks: an
Excel file titled “Excel Work Papers,” a Word document titled “PBC Documents,” and a Word
document titled “Prior Year Work Papers.”
You will document your completion of the audit in the Excel Work Papers file provided.
Materiality for PPE has been set at $1,000. There have been no material misstatements in the
PPE account in previous years and no changes in personnel or accounting methods. Your team is
using a control reliance strategy, and the senior has completed the internal controls testing. The
overall Risk of Material Misstatement for PPE is assessed as low. This is your first audit, and
you want to impress your senior. One way to do so is through your documentation skills—in
particular, your tick mark explanations. Tick marks are used to indicate to your senior that you
have performed a certain task or obtained additional information regarding an amount. The
explanation/meaning of each tick mark you use should be included on a tick mark legend that
will immediately follow the working paper. Your senior will be most impressed with tick mark
explanations that are clear, objective, and concise, but yet still informative enough so that he/she
knows what work you performed and conclusions you reached.1
Prior to fieldwork, the senior requested several documents from the client that you will need to
successfully complete your portion of the audit. The client has provided those documents and
you will find them in the PBC Documents file, where PBC stands for prepared by client. In
addition to these documents, you will also need last year’s audit work paper files to fully
complete your portion of the audit. The senior has pulled the prior year work papers and has
included the documents you will need in the file titled Prior Year Work Papers.
As you complete your audit, you will notice that not all of the information you need is included
in the PBC Documents and Prior Year Work Papers files. Therefore you may need to ask the
client for additional documents and explanations. Your main contact at the client is the
1
controller, J. M. Perkins. Yet another way to impress your senior and also the client is through
your communications with the client. You want to be sure that you are fully prepared and
professional in your communications with the client. This includes properly greeting the client,
acting in a friendly and professional manner, asking clear and concise questions that you
prepared prior to your meeting, and asking follow-up questions if necessary. Also, remember that
obtaining evidence solely through verbal inquiry of the client is not sufficient audit evidence.
Therefore, you must corroborate all client explanations by examining documents that validate
what they are telling you.
Requirements
Task 1: Substantive Det
ail Testing of Gross PPE Additions
Perform the steps in the Audit Program—Testing of Gross Property, Plant, and Equipment,
located in the fourth tab of the Excel Work Papers file and labeled “WP #5600—Audit
Program.” The first three tabs of the Excel Work Papers file contain work papers that have been
completed by the senior which document the Property, Plant, and Equipment acquisition process
and the results of internal controls testing for the acquisition process. The completed control
testing work papers are provided for you in the event that you find errors as you are completing
the steps in WP #5600—Audit Program. Should you find an error(s), you will need to consider
and document the impact the error(s) has on controls in a tick mark on the work paper where the
error is discovered. As you are completing the steps in the Audit Program, be sure to document
any work performed on the appropriate work paper in the Excel Work Papers file. After you
complete each step, sign off on both the Excel Work Paper and the Audit Program itself, and
indicate on the Audit Program which management assertion you think the step best addresses. A
list of the management assertions is provided in the Glossary. Use the following guidance and
tips as you complete each step.
1. Step 1 of the Audit Program (WP #5600—Audit Program) requires the auditor to obtain and
foot a trial balance from the client. The trial balance contains the prior year and current year
balances in all general ledger accounts. Your senior has already obtained this trial balance and
used audit software to break up the trial balance into separate “lead sheets” for each major area
of testing.
Your senior provided you with the Property Lead Sheet (WP #5610—Lead Sheet), which you
will use in your property testing. Therefore, the senior completed a portion of this audit step for
you. To finish completing the step, you will need to foot (i.e., add) the columns on the lead sheet.
You may use a commonly used tick mark symbol “f” to indicate that you performed the footing
and that the totals are mathematically accurate. Commonly used tick marks, such as “f,” do not
need to be defined in the tick mark legend. Place an “f” symbol to the bottom of each column
that properly foots down. If any balances are not mathematically accurate, you must use a
specific tick mark (such as {a}, {b}, {c}) to explain the difference. Upon completing this step,
sign off on Step 1 of the Audit Program below the senior sign off.2
2
2. Step 2 of the Audit Program requires you to agree the prior year (i.e., 2010) property account
balances listed in the Property Lead Sheet to the prior year balances from the client’s 2010
audited financial statements. If the amounts listed in the 2010 column of the lead sheet agree to
amounts you find in the prior year audited financials, you should indicate that they agree by
placing a commonly used tick mark “PY” in the tick mark column to the right of each balance. If
any account balance does not agree, you will need to perform additional investigation as to why
it does not agree and then document the reasons using a different specific tick mark. Using a
specific tick mark means that you place a symbol such as {a}, {b}, {c}, and so on next to the
balance that does not agree and then write your explanation for why the number does not agree
in the tick mark legend following the Property Lead Sheet.
3. Step 3 of the Audit Program requires you to obtain a schedule showing changes made to the
property accounts since the end of last year (December 31, 2010) to the end of the current year
(December 31, 2011). This is sometimes referred to as a “roll forward” schedule, since it shows
how the prior year audited balances changed via additions and disposals during the 2011 year to
result in the ending December 31, 2011 balances. A roll forward is useful because your audit
firm has already subjected the beginning property balances (i.e., as of December 31, 2010) to
testing last year and believed them to be reliable. Instead of testing the entire balance of property
at December 31, 2011, your audit firm can simply test any 2011 changes to the property accounts
since last year when the balances were tested.
Your senior has already obtained the roll forward from the client and given it to you (see WP
#5615—Roll Forward in the Excel Work Paper file). To complete Step 3, you simply need to test
that the roll forward activity shown is mathematically accurate across all rows and down all
columns. Remember, indicate with the commonly used tick mark “f” if row and column totals
are accurate. If any balances are not mathematically accurate, you must use a specific tick mark
(such as {a}, {b}, {c}) to explain the difference.3
4. Step 4 of the Audit Program requires you to agree the beginning (December 31, 2010) and
ending (December 31, 2011) balances per the roll forward to the respective balances on the
Property Lead Sheet. This step is needed because your audit firm plans on testing the activity
listed in the roll forward (i.e., 2011 additions and disposals), and it is important that that the
property balances before and after the activity match with the trial balance amounts. For each
balance on the roll forward that agrees to the corresponding balance on the Property Lead Sheet,
write the work paper number of the Property Lead Sheet to the right of the balance. Be sure to
include a “cross-reference” to the Property Roll Forward work paper next to each balance on the
Property Lead Sheet work paper as well.
If any balances do not agree, you must investigate the difference and use a specific tick mark
(such as {a}, {b}, {c}) to explain the difference. One way you can provide reconciling detail
(i.e., show how it does not tie) is by “pulling” the amount to the bottom of the work paper. You
would do this by inserting a capital letter (A, B, and so forth) beside the amount and then again
at the bottom of the work paper where you provide the reconciliation.4
5. Step 5 of the Audit Program requires you to begin the process of testing current year property
additions. Note that your senior has already set up a work paper for you to document your
3
additions testing (see WP #5615-A—Additions Testing). The senior has also previously obtained
the detailed listing of all additions to property accounts made during the current year from the
client. You will find the listing in the PBC Documents file.
You will need to make sure the listing foots and agrees to the total additions listed on the
Property Roll Forward. Your senior has advised you that the best way to show that the balance
per the additions listing matches the additions total per the roll forward is to complete the top
half of the Additions Testing work paper. Be sure to properly reference and cross-reference any
amounts obtained from other work papers. Any material difference noted needs to be
investigated, and the results of the investigation should be discussed in a tick mark explanation.
6. Step 6 of the Audit Program requires the auditor to make a sample of additions from the
detailed additions listing. Please note that your senior has already performed the appropriate
calculations to determine a required sample size of two (see the Additions Testing work paper
and tick mark {a} for more details). The senior has also already marked which two specific
additions you should test, as indicated with a check mark on the Additions Listing included in
the PBC Documents file. Because the senior completed this step already, you will notice the
senior’s sign-off on the Audit Program, indicating that you can proceed to the next step.
7. Step 7 of the Audit Program asks you to “vouch” each addition selection. The supporting
documents required are all invoices and checks related to the purchase of the selected property.
The senior previously requested this information from the client, therefore you will find these
documents in the PBC Documents file.5 Document your testing in the Additions Testing work
paper using the format already set up for you by your senior on the work paper. Any issues or
discrepancies noted should be explained in a specific tick mark.
8. Step 8 requires you to obtain evidence that the two additions selected for testing actually
exist. To do this, you must verify the physical existence of the additions selected. This means
physically observing each asset or otherwise confirming with knowledgeable client personnel
outside of the accounting department that the asset exists and was in good working order as of
December 31, 2011. [You are to assume that this physical observation was properly performed.]
After completing this step, you will have completed all the testing in this area. Therefore, you
should sign off on each excel work paper that you have completed (i.e., the Property Lead Sheet,
the Roll Forward, and the Additions Testing work papers) underneath each work paper number
in the upper right-hand corner.
Task 2: Substantive Analytical Procedures for Testing Depreciation Expense
The audit team has determined that substantive analytical procedures will be used to audit the
depreciation expense account. Last year the depreciation expense account was also audited using
substantive analytical procedures, and no errors were noted. The client provided its formal Fixed
Asset Depreciation Policy (see PBC Documents file), which may help you during your testing.
As with the substantive testing performed during Task 1, you will document your testing
electronically in various tabs within the Excel Work Papers file provided with this case. To test
depreciation expense, finish completing the steps in the audit program for depreciation, located
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in the Excel Work Papers file provided with this case under the tab labeled “WP #5620—Audit
Program—Depreciation.” You will notice the senior has already completed and signed off on
Step 1 of the audit program, obtained the trial balance from the client. Your senior had
previously obtained the trial balance and used audit software to break up the trial balance into
separate “lead sheets” for each major area of testing. You will only need the Depreciation
Expense Lead Sheet for this task. Your senior provided you with the Depreciation Expense Lead
Sheet (WP #5625—Depreciation Lead Sheet), which you will use in your testing. You can begin
with Step 2 of the audit program. After you complete each step, sign off on both the Excel Work
Paper where you performed your work and on the Audit Program itself. Also, indicate on the
Audit Program which management assertion you think the step best addresses. Use the following
guidance and tips as you complete each step.
1. Step 2 of the Audit Program (WP #5620—Audit Program—Depreciation) requires you to
agree the prior year depreciation expense listed in the Depreciation Expense Lead Sheet (WP
#5625—Depreciation Lead Sheet) to the prior year audited balances from the prior year working
papers. If the amount listed in the 2010 column of the Depreciation Expense Lead Sheet agrees
to the amount you find in the prior year working papers, you should indicate that they agree by
placing a commonly used tick mark “PY” in the tick mark column to the right of the 2010
balance. If the account balance does not agree, you will need to perform additional investigation
as to why it does not agree and then document the reasons using a specific tick mark.
2. Step 3 of the Audit Program requires you to perform substantive analytical procedures to test
depreciation expense for the year ended December 31, 2011. You will perform this testing in the
tab, WP #5630—Depreciation Expense Testing.
The substantive analytical procedures you will use to audit this balance involve calculating an
“expectation” for December 31, 2011 depreciation expense. The work paper (WP #5630—
Depreciation Expense Testing) in the Excel Work Papers file has already been set up for you
based on the senior’s idea for calculating an expectation of December 31, 2011 depreciation
expense. You should be able to fill in balances, formulas, and references/tick marks as needed. In
this case, the senior has determined that a reasonable expectation for December 31, 2011
depreciation expense can be calculated by applying a ratio based on last year’s audited
depreciation expense and last year’s gross PPE (see WP #5630 for guidance calculating last
year’s ratio).
Once you have calculated your expectation of December 31, 2011 depreciation expense,
compare your expectation to actual recorded December 31, 2011 depreciation expense. The
difference between your calculated expectation and the actual recorded amount should be
compared to the pre-determined threshold. The pre-determined threshold is our previously noted
materiality amount, $1,000. Any difference between the expectation and the recorded amount
that is greater than the pre-determined threshold will need to be further investigated with the help
of the client.
Should you discover the need to talk to the client, be ready to explain how you calculated your
expectation and ask him/her for ideas for why the expectation is materially different than the
recorded balance. Remember, you must get evidence corroborating any client explanations. This
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investigation may result in you discovering a misstatement in the depreciation expense account;
alternatively, it may result in you discovering that you need to revise your calculation of the
expected depreciation expense based on a valid reason. You will need to use professional
judgment to determine how to proceed after your investigation. Be sure to complete the work
papers with appropriate references and specific tick marks as needed to explain the amounts
found on your work paper. You will want to describe in a tick mark any formula you used to
arrive at an amount. If you need to make revisions to the way you calculate the expected
depreciation expense, do not do so over your original calculations. Leave your original
calculations as are and include the detail of your new calculations with revisions at the bottom of
the Depreciation Expense Testing work paper. Also, be sure to explain carefully in a specific tick
mark what is adjusted and why it is needed.
CASE GLOSSARY
Below is further explanation of audit terminology used in the case. The terms are listed in order
of reference in the case material.
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Control Reliance Strategy—The auditor has chosen to rely on the company’s internal
controls over a certain area. Therefore audit testing involves testing internal controls to
determine effectiveness. If controls are effective, auditors will “rely” on internal controls
and perform less substantive testing in that area.
Internal Controls—The policies and procedures a company has in place to safeguard
assets, ensure reliable financial reporting, ensure compliance with laws and regulations,
and increase the efficiency of operations.
Risk of Material Misstatement—The risk that a material misstatement exists in the
financial statements, whether caused by error or fraud.
Materiality—The magnitude of a misstatement or omission that would have changed or
influenced the judgment or decisions of a reasonable person relying on that information.
Tick Mark—a symbol indicating a certain task has been performed. Upon completing a
task or obtaining more information regarding an amount, an auditor will denote that work
has been done by placing a tick mark (such as a letter or symbol) next to the relevant
amount on the work paper. The auditor will then describe in a tick mark legend what the
tick mark itself means, i.e., exactly what work was performed and what conclusion was
reached as a result. Tick mark legends typically appear at the bottom of the work paper
on which it appears or on a separate work paper immediately following. Individual firms
often have standard tick marks to denote commonly performed audit tasks. For example,
a common task throughout the audit is to verify that beginning balances agree to prior
year ending balances. For common tasks such as this, firms often have a policy of using
the same tick mark, i.e., a standard tick mark, each time that particular task is performed.
For example, the firm may use the tick mark “PY” to denote that the auditor verified that
the beginning balance agrees to the prior year ending balance. The auditor would
continue to use the tick mark “PY” on any working paper where the beginning balance in
question was verified to the prior year ending balance. Standard tick mark symbols, such
as “PY” in this example, require no further explanation in a tick mark legend, as they are
typically defined earlier in the audit work paper file.
Management Assertions about Account Balances at the Period End:6
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Existence—assets, liabilities, and equity interests exist.
Rights and obligations—the entity holds or controls the right to assets, and liabilities are
the obligation of the entity.
Completeness—all assets, liabilities, and equity interests that should have been recorded
have been recorded.
Valuation and allocation—assets, liabilities, and equity interests are included in the
financial statements at appropriate amounts, and any resulting valuation or allocation
adjustments are appropriately recorded.
Audit Program—a list of procedures and tasks to be performed by the auditor to complete
a portion of an audit.
Trial Balance—a list of the company’s prior year and current year general ledger accounts
and ending balances. The sum of all debit balances should equal the sum of all credit
balances.
Lead Sheet—a working paper created by the auditor that shows the detailed general
ledger accounts that make up a financial statement account (Messier et al. 2008).
Auditors typically place a lead sheet in the beginning of the section of the audit file that
contains working papers and support for that financial statement account. Completed
working papers and support should indicate balances that agree to the lead sheet.
Foot—to add a column down.
Roll Forward—a schedule that shows details of how accounts changed over the year,
categorized into a beginning balance column, additions column, a disposals or
subtractions column, and an ending balance column. The ending balances should equal
the beginning balances plus any additions and minus any disposals (subtractions).
Reconciliation—demonstrating that amounts do not agree and showing the amount by
which they differ. For example, if the Property Lead Sheet indicated a gross property
balance of $150,000, yet the Property Roll Forward indicated a gross property balance of
$149,500, you would need to provide a reconciliation. You would do so by placing a
capital letter “A” beside the gross property balance on the Property Lead Sheet and then
again at the bottom of the Property Lead Sheet where the reconciliation is performed. The
reconciliation for this example would be as follows: The difference of $500, indicated by
the specific tick mark {a}, would be further explained (or deemed immaterial) in the tick
mark legend. The “5615” is a cross-reference to the Roll Forward work paper number.
Vouch—to verify an amount by tracing it back to supporting documents.
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