Question

Value & Associates is the auditor for a manufacturing company with a balance sheet that includes the line item 'Property, plant and equipment'. The company's management has asked Value whether adjustments or reclassifications are required for the following material items that have been included in or excluded from 'Property, plant and equipment'. 1. A block of land was acquired during the year. The land is the future site of the client's new headquarters, which will be constructed in the following year. Commissions were paid to the real estate agent used to acquire the land, and expenditures were made to relocate the previous owner's equipment. These commissions and expenditures were expensed and are excluded from 'Property, plant and equipment'. 2. Clearing costs were incurred to make the land ready for construction. These costs were included in 'Property, plant and equipment'. . 3. During the land-clearing process, timber and gravel were recovered and sold. The proceeds from the sale were recorded as other income and are excluded from 'Property, plant and equipment'. 4. A group of machines was purchased under a royalty agreement that provides royalty payments based on units of production from the machines. The cost of the machines, freight costs, unloading charges, and royalty payments were capitalised and are included in 'Property, plant and equipment'. Required (a) Identify the audit objectives (assertions) for 'Property, plant and equipment', and indicate the main substantive tests relating to each. (b) Indicate whether each of items 1 to 4 above requires one or more audit adjustments or reclassifications, and explain why (or why not).

Answer 1

Please find the answers below.Thanks.

a.Property plant and equipment normally includes assets with expected useful life of more than one year which has been used in the business operation and not purchased for resale option.In connection with the review of the PPE the auditors must satisfy the following conditions.

1.Determine the existence of the documented plant ,property and equipment.

2.Establish the completeness of the documented plant,property and equipment.

3.Establish the clients rights to the documented plant property and equipment.

4.Determine that the valuation or allocation of the cost of plant ,property and equipment in accordance with GAAP.

	B
Item no	is auditing adjustment or reclassification required -Yes /No	Reasons why audit adjustments or reclassifications are required or not required
1	Yes	Adjustments are required because commission paid to the real estate agent for acquisition of the land and expenditure made to relocate the equipment have to be included in the total cost of land which is a part of property,plant and equipment.
2	No	No adjustments is required because clearing costs were already included in property,plant and equipment.
3	Yes	Adjustments is required because timber and gravel are a part of the property and if it is sold the cost of property is reduced.Also sale of property should not be recorded as other income.
4	Yes	Adjustment is required because the costs of machines,freight costs and uploading charges should only be included in purchases of machinery.Royalty payment is a part of expense and it should not be included in property plant and equipment.