Question

1. R13.7: Explain the relationship between the repairs and maintenance expense account and the PPE asset account. Why is the auditor interested in examining debits to both accounts when auditing PPE? Explain your answer with reference to the assertions at risk.

2. R13.9: Explain why completeness is a more critical assertion for long-term debt than for cash, inventory, or PPE. What procedures are primarily designed to address the completeness assertion for long-term debt?

Answer 1

Solution R13.7

Repairs and maintenance expense account and the PPE asset account, both relates to expenditure on PPE items. Normal repairs and maintenance which are not capital in nature are debited to repairs and maintenance expense account. On the other hand, if expenditure is capital in nature then amount is debited to PPE asset account. Items that increases the economic life of the asset, enhances productivity and efficiency and is useful for more than one year are categorized as capital expenditure.

Auditor while auditing PPE account cycle, gives special significance to both the general ledger. If the asset is wrongly expensed off, then it carries misstatements in the PPE accounting cycle. Similarly the other way PPE should not include any item which is of normal repairs and maintenance expenses.

The assertion for this risk is Accuracy. Risk for this accounting cycle if capital items improperly expensed off by the Company. Hence both the general ledgers must be accurate so that there should be no material misstatements. Hence auditor focuses on both the general ledgers very carefully.

Solution R13.9

Completeness assertion is very critical for long term debt because of the nature of account. Long term debt generally carries high account balance and meeting of covenant risk is high in this accounts cycle as compare to other areas such as cash, inventory and PPE. Hence it's very important to test completeness assertion for long term debt accounting cycle.

These are some of the procedures performed to cover the completeness assertion-:

(i) Auditor should verify all the board minutes to check all the borrowings availed by the company during the year. Correspondences with bank such as external confirmation should independently rolled out by the auditor. Independent confirmation can cover much of the completeness assertion.

(ii) Sanction letter, borrowing agreements, collateral agreements should be checked by the Company to test the completeness of borrowings.

(iii) All the general balances of trial balance should linked to financial statement to ensure every account is captured in the financial statement.

(iv) Payment entries should be traced from bank statements to assess whether any repayment has been done for borrowings or not by the entity.

Above procedures can address the risk of completeness in long term debt accounting cycle.