Question

Question 1

You are performing the year-end audit of Halvorson Fine Foods Ltd for 31^st December 2012. The client has prepared the following schedule for fixed assets and related allowance for depreciation accounts.

HALVORSON FINE FOODS LTD
ANLAYSIS OF FIXED ASSETS
FOR THE YEAR ENDED 31 DECEMBER 2012
Description	Final Balance, 31 December	Additions	Retirements	Final Balance, 31 December
Assets:	$	$	$	$
Land	22,500	5,000		27,500
Buildings	120,000	17,500		137,500
Machinery and equip.	385,000	40,400	26,000	399,400
	$527,500	$62,900	$26,000	$564,400
Allowance for depreciation:	$	$	$	$
Building	60,000	5,150		65,150
Machinery and equip.	173,200	39,220		212,420
	$233,200	$44,370		$277,570

You have compared the opening balances with your prior-year audit working papers. The following information is found during your audit:

1. All equipment is depreciated on a straight-line basis (no salvage value taken into consideration) based on the following estimated lives: buildings, 25 years; all other items,

10 years. The corporation’s policy is to take one-half year’s depreciation on all asset acquisitions and disposals occurring during the year.

2. The corporation completed the construction of a wing on the plant building on 30 June of this year. The useful life of the building was not extended by this addition. The lowest construction bid received was $17,500, the amount recorded in the buildings account. Company personnel were used to construct the addition as a cost of $16,000 (materials $7,500, labour $5,500 and overhead $3,000)

3. On 18^th August, Halvorson paid $5,000 for paving and fencing a portion of land owned by the corporation for use as a parking lot for employees. The expenditure was charged to the land account.

4. The amount shown in the retirement’s column for the machinery and equipment asset represents cash received on 5^th September, on disposal of a machine purchased in July 2001 for $48,000. The bookkeeper recorded a depreciation expense of $3,500 on this machine in 2012.

5. Crux City donated land and building appraised at $10,000 and $40,000, respectively, to Halvorson for a plant. On 1^st September, the corporation began operating the plant. Because no costs were involved, the bookkeeper made no entry for the foregoing transaction.

Required:

In addition to inquiring of the client, explain how you found each of the described items of information during the audit.

Answer 1

Answer :

a. Items 1 through 6 would have been found in the following way:

1. The company's policies for depreciating equipment are available from several sources:

a)  The prior-year's audit working papers and permanent file.

b) Footnote disclosure in the annual report and SEC Form 10-K.

c)  Company procedures manual.

d) Detailed fixed asset records.

2. The building wing addition would be apparent by the addition to buildings during the year. The use of the low construction bid amount would be found when support for the addition was examined. When it was determined that this inappropriate method was followed, the actual costs were determined by reference to construction work orders and supporting data. The wing was also examined.

3. The paving and fencing was discovered when support was examined for the addition to land. These costs should be charged to Land Improvements and depreciated.

4. The details of the retirement transactions were determined by examining the sales agreement, cash receipts documentation, and related detailed fixed asset record. This examination would be instigated by the recording of the retirement in the machinery account or the review of cash receipts records.

5. The auditor would become apprised of a new plant in several ways:

a)  Volume would increase.

b) Account details such as cash, inventory, prepaid expenses, and payroll would be attributed to the new location.

c)  The transaction may be indicated in documents such as the minutes of the board, press releases, and reports to the stockholders.

d) Property tax and insurance bills examined show the new plant.

One or more of these occurrences lead the auditor to investigate the reasons and circumstances involved. Documents from the city and appraisals would be examined to determine the details involved.