Company A is a construction company and is a new audit client of your firm. It h
ID: 2327933 • Letter: C
Question
Company A is a construction company and is a new audit client of your firm. It has never been audited but a different accounting firm performed a review engagement for y/e 31 Dec 2016. Your firm is auditing A’s financial statements for y/e 31 Dec 2017.
Company A is privately owned by the Jones family in Country X, using the X$ currency. The president, VP, secretary/treasurer, controller and various levels of managers are all family members.
All management employees who must travel to job sites (including 9 family members) are assigned company-owned cars for their personal use. The company has a total of 80 company cars. Employees have access to these cars at all times, and the cars do not need to be returned to the company parking yard except for periodic servicing.
The company also owns vans and trucks that are used by various company employees to transport equipment, supplies, labour, and material to and from job sites. These vehicles are stored at the company facilities when not in use and are never available for personal use.
The company also has a number of special-use heavy vehicles that are used at job sites and stored at the job site or in the parking yard of the company.
As part of the 2017 audit, you have been assigned the task of auditing fuel expense. The general ledger fuel expense account shows X$317,224. According to the client, the 2016 figure was X$375,542.
Your audit manager has asked you to perform some form of analytical procedure on fuel expense. Company A’s staff has gathered the following information for you:
Type of Vehicle
No.
Fuel Usage (miles per gallon)
Miles or Usage
Small cars
60
20 mpg
21,000/each
Large cars
20
10 mpg
25,000/each
Pickup trucks
45
8 mpg
19,000/each
V ans
35
7 mpg
9,500/each
Flatbed trucks
6
4 mpg
6,500/each
Dump trucks
5
3 mpg
7,300/each
Loaders
3
3 gallon/hr
Unknown**
Bulldozers
4
6 gallon/hr
Unknown**
Graders
2
5 gallon/hr
69 person-days*
Scrapers
1
6 gallon/hr
80 person-days*
Other information:
Cars and pickup trucks run on petrol, which has averaged $3.05/gallon during 2017. All other vehicles use diesel. You have determined the typical diesel price increases during 2017 as below.
* 1 person-day = 8 hours
** According to the construction foreman, these are in continual usage every day a job is in progress. The company has been extremely busy but crews do not work overtime or weekends
Date
Price of diesel per gallon in X$
1/Jan/17
2.90
1/Mar/17
2.94
1/Jun/17
2.99
1/Nov/17
3.05
Required:
1. What is (are) the primary management assertion(s) related to fuel expense in this case?
2. What is your team’s $ value estimate for Company A’s fuel expense for 2017?
3. What is your conclusion – is the client’s fuel expense misstated (over/under-stated)? Why/why
not? Do you recommend a correcting journal entry be put through?
4. What further information would you need to assist you in arriving at a conclusion for
Requirement 2?
Type of Vehicle
No.
Fuel Usage (miles per gallon)
Miles or Usage
Small cars
60
20 mpg
21,000/each
Large cars
20
10 mpg
25,000/each
Pickup trucks
45
8 mpg
19,000/each
V ans
35
7 mpg
9,500/each
Flatbed trucks
6
4 mpg
6,500/each
Dump trucks
5
3 mpg
7,300/each
Loaders
3
3 gallon/hr
Unknown**
Bulldozers
4
6 gallon/hr
Unknown**
Graders
2
5 gallon/hr
69 person-days*
Scrapers
1
6 gallon/hr
80 person-days*
Explanation / Answer
1 The primary management assertions related to fuel expenses in this case: i Accuracy: Full amount of fuel expenses are recorded without error. ii Classification: All the fuel expenses are recorded in the correct account in the general ledger. iii Completeness: Fuel expense are complete in nature. iv Cutoff: Fuel expenses are recorded in the correct reporting period v Occurrence: Fuel expenses which are recorded actually took place. 2 $ value estimate for Company A's fuel expense for 2017 Type of Vehicle number Fuel Usage Miles/Usage Price per gallon Fuel Expense Small Cars 60 20 mpg 21000/each $3.05 $192,150.00 Large Cars 20 10 mpg 25000/each $3.05 $152,500.00 Pickup Trucks 45 8 mpg 19000/each $3.05 $325,968.75 Vans 35 7 mpg 9500/each $2.97 $141,075.00 Flatbed trucks 6 4mpg 6500/each $2.97 $28,957.50 Dump trucks 5 3 mpg 7300/each $2.97 $36,135.00 Loaders 3 3 gallon/hr 2080 $2.97 $55,598.40 Bulldozers 4 6 gallon/hour 2080 $2.97 $148,262.40 Graders 2 5 gallon/hour 552 $2.97 $16,394.40 Scrapers 1 6 gallon/hour 640 $2.97 $11,404.80 $1,108,446.25 Average price for diesel = $2.97 Loader and bulldozer usage = 260 working days x 8 hour per day Grader usage = 69 x 8 hours Scrapers usage = 80 x 8 hours 3 Fuel expenses are misstated. It is under-stated. Fuel expenses are much more than what is shown in general ledger. Thus correcting journal entry is required to restate the fuel expenses correctly. 4 Further information required is personal use of cars by the owners of the company.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.