DietWeb Inc. (hereafter DietWeb) was incorporated and began business in March of

Question

DietWeb Inc. (hereafter DietWeb) was incorporated and began business in March of 20X1, seven years ago. You are working on the 20X8 audit - your CPA firm's fifth audit of DietWeb. For each audit objective, select a substantive procedure that would help to achieve that objective. Enter the appropriate capital letter in the space provided. Each of the procedures may be used once, more than once, or not at all. Substantive procedure A. Trace opening balances in the summary schedules to the prior year's audit working papers. B. Review the provision for depreciation expense and determine that depreciable lives and methods used in the current year are consistent with those used in the prior year. C. Determine that responsibility for maintaining the property and equipment records is segregated from the responsibility for custody of property and equipment. D. Examine deeds and title insurance certificates. E. Perform cutoff test to verify that property and equipment additions are recorded in the proper period. F. Determine that property and equipment is adequately insured. G. Physically examine a sample of recorded beginning property items and all recorded major property and equipment additions. H. Analyze repairs and maintenance expense.

Audit objective 1. DietWeb has legal rights to property and equipment acquired during the year. 2. DietWeb recorded property and equipment acquired during the year that did not actually exist at the balance sheet date. 3. DietWeb's property and equipment was properly valued at the balance sheet date. 4. DietWeb recorded all property and equipment assets that were purchased near year-end. 5. DietWeb recorded all property retirements that occurred during the year. 6. DietWeb capitalized all acquisitions that occurred during the period.

Explanation / Answer

1. (D) The requirement is to identify the best substantive procedure to determine that DietWeb has legal rights to the property and equipment acquired during the year. Answer (D) is correct because the deeds and title insurance certificates will provide evidence that the company owns the property and equipment.

2. (G) The requirement is to identify the best substantive procedure to determine that DietWeb recorded property and equipment actually exists. Answer (G) is correct because physically examining the items will provide this evidence.

3. (B) The requirement is to identify a substantive procedure to test whether DietWeb's net property and equipment was properly valued at the balance sheet date. Answer (B) is correct because reviewing depreciation expense (and the related allowance for doubtful accounts) will indicate whether the net value is proper.

4. (E) The requirement is to identify how an auditor may test whether DietWeb recorded all property and equipment assets that were purchased during the year. Answer (E) is correct because performance of a cutoff test will indicate whether additions made during the year were properly recorded.

5. (G) The requirement is to identify a substantive procedure to test whether DietWeb recorded all property retirements that occurred during the year. Answer (G) is correct because examining the major recorded property and equipment items may identify situations in which an item has been retired (often due to its replacement) and is no longer available for physical examination.

6. (H) The requirement is to identify a substantive procedure to test whether DietWeb capitalized acquisitions Answer (H) is correct because an analysis of repairs and maintenance accounts will reveal a situation in which such an acquisitions has inappropriately been recorded as an expense and not capitalized.

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