Audits of financial statements are designed to determine whether account balance
ID: 2641098 • Letter: A
Question
Audits of financial statements are designed to determine whether account balances are materially correct. Assume that your client is a manufacturing company that has the following assets on its balance sheet
Machinery: $1,278,000
Accumulated depreciation: $386,000
Leased equipment: $550,000
Describe a substantive audit procedure that can be used to determine that all leased equipment that should have been capitalized during the year was actually capitalized. Please refer to the knowledge from intermediate accounting and the requirements of an audit working paper to design a template audit working paper that can be used to examine whether a leased equipment should have been capitalized or treated as lease expense
The machinery account shows that the company retire approximately $400,000 of old machinery this year. Identify a substantive audit procedure that will determine the machinery account was properly accounted for during the year
Assuming the auditor determines that the machinery were properly retired, what other information does the auditor need to know to have reasonable assurance that the machinery-net of depreciation-is properly reflected on the balance sheet?
How can an auditor determine that all the machinery and leased equipment on the account actually exist?
Explanation / Answer
A finance lease or capital lease is a type of lease. It is a commercial arrangement where:
The finance company is the legal owner of the asset during duration of the lease.
However the lessee has control over the asset providing them the benefits and risks of (economic) ownership.
Audit procedure for determinig capitalization of leased equipments.
Audit procedure for depreciation and machinery account.
BAsed on following the auditor can determine that all the machinery and leased equipment on the account actually exist:
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