For each analytical procedure listed below, identify a potential misstatement in the property management accounts it...

For each analytical procedure listed below, identify a potential misstatement in the property management accounts it could help find.

A. Compute the ratio of depreciation expense to the related property, plant , and equipment accounts and compare to prior years’ ratio

B. Compare monthly or annual repairs and maintenance with previous years.

C. Compute ratio of insurance expense to the related property, plant, and equipment accounts and compare to prior years’ ratios.

Solutions

Expert Solution

A. Computing the depreciation to the PPE account balance will give us the average rate of depreciation for that particular category of PPE and, and comparing it to the previous year figures will help in identifying a potential mistake in the calculation and the recording of depreciation for each category of PPE. On the identification of unreasonable fluctuations in the depreciation rates, the reason for the same can be identified (say, a change in the rate of depreciation or change in method of depreciation). The reason may also be a miscalculation of depreciation and this can also be identified easily.

B. Calculating the monthly and annual repairs to the previous year figures will give us a trend analysis of the said expenses. By undertaking this exercise, we can identify any unreasonable spikes in the expense, which may be due to any capital expense misstated as a revenue expense or an erroneous booking of an unrelated expense if there is a monthly/annual repairs contract with fixed payments.

C. Computing the ratio of insurance expense to the related PPE will help in determining if the insurance premium cost has increased or decreased over the year. A potential misstatement that may be identified is the erroneous recording of expense under the wrong head or recording of insurance premium of one property against another i.e. a mismatch of the property and the insurance recorded against it.It will help us identify an unreasonable expense for the insurance of the property.

ekkarill92 answered 1 year ago

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