17-22.The key internal controls related to Grant's property, equipment and related transactions that Harris may consider in assessing control risk include the following: Advance approval in accordance with management's criteria is required for property and equipment transactions. Approval authority for transactions above an established dollar value is required at a higher level, such as the board of directors. Property and equipment transactions are adequately documented. There are written policies covering capitalizing expenditures, classifying leases, and determining estimated useful lives, salvage values, and methods of depreciation and amortization. There are written policies covering retirement procedures that include serially numbered retirement work orders, stating reasons for retirement and bearing appropriate approvals. There are adequate policies and procedures to determine whether property and equipment are received and properly recorded such as a system that matches purchase orders, receiving reports and vendors' invoices. There are adequate procedures to determine whether dispositions of property and equipment are properly accounted for and proceeds, if any, are received in accordance with management's authorization. A property and equipment subsidiary ledger is maintained showing additions, retirements, and depreciation, and the ledger is periodically reconciled. Property and equipment is physically inspected and reconciled at reasonable intervals with independently maintained property and equipment records. An annual budget is prepared and monitored to forecast and control acquisitions and retirements of property and equipment. Reporting procedures assure prompt identification and analysis of variances between authorized expenditures and actual costs. Property and equipment is protected by adequate safeguards. Property and equipment is insured in accordance with management's authorization. Documents evidencing title and property rights are periodically compared with the detailed property records. The entity employs internal auditors to test whether the internal control structure policies and procedures are operating effectively.

17-23. a.The following matrix identifies the substantive tests pertaining to property, plant and equipment and the audit objectives pertaining to each.

CategorySubstantive TestSpecific Audit Objectives

Initial Procedures1) Obtain and understanding of the entity and its environment and determine:a) The significance of plant assets, and changes in plant assets, to the entity.b) Key economic drivers that influence the entitys acquisition of plant assets.c) Industry standards for the extent to which the entity is capital intensive and the impact of plant assets on earnings. d) Understand the degree to which the company has used variable interest entities and operating leases to finance assets.2) Perform initial procedures on plant assets balances and records that will be subjected to further testing.a) Trace beginning balance for plant assets and accumulated depreciation to prior years working papers.b) Review activity in general ledger accounts plant assets and depreciation expense and investigate entries that appear unusual in amount or source.c) Obtain client-prepared schedules of plant asset additions, retirements and depreciation expense, and determine that they accurately represent the underlying accounting records from which they were prepared by:i) Footing and crossfooting the schedules and reconciling the totals with increases or decreases in the related general ledger balances during the period.ii) Testing agreement of items on schedules with entries in related general ledger accounts.All

VA4

EO1, EO4

VA4

VA4

Analytical Procedures3) Perform analytical procedures:a) Develop an expectation for plant assets using knowledge of the industry and the entitys business activity b) Calculate ratios:i) Fixed asset turnoverii) Depreciation expense as a percent of salesiii) Repair and maintenance expense as a percent of salesiv) Rate of return on assetsc) Analyze ratio results relative to expectations based on prior years, industry data, budgeted amounts, or other data.All

Tests of Details of Transactions4) Vouch plant asset additions to supporting documentation.5) Vouch plant asset disposals to supporting documentation.6) Vouch a sample of entries to repairs and maintenance expense. 7) Vouch the recording of new capital lease and operating leases to underlying contracts.EO1, VA1, PD1, EO4, VA4EO2, VA2, PD2, EO4, VA4EO3, VA3, PD3, EO4, VA4EO1, C1, VA1, PD1

Tests of Details of Balances8) Inspect plant asset.a) Inspect plant asset additions.b) Tour other plant assets and be alert to evidence of additions and disposals not included on clients schedules and to conditions that bear on the proper valuation and classification of the plant assets.9) Examine title documents and contractsEO4EO4, C1, C2, C4

RO1

Tests of Details of Accounting Estimates10) Evaluate the fair presentation of depreciation expense by evaluating the appropriateness of useful lives and estimated salvage values. 11) Determine if any significant events have resulted in an impairment of the value of plant assets.VA5

VA6

Tests of Details of Presentation and Disclosure12) Compare statement presentation with GAAP.a) Determine that plant assets and related expenses, gains, and losses are properly identified and classified in the financial statements. b) Determine the appropriateness of disclosures related to the cost, book value, depreciation methods, and useful lives of major classes of plant assets, the pledging of plant assets as collateral and the terms of lease contracts. c) Evaluate the completeness of presentation and disclosures for receivables in drafts of financial statements to determine conformity to GAAP by reference to disclosure checklist.d) Read disclosures and independently evaluate their understandability.PD4, PD7

PD4, PD7

PD5

PD6

b.

Item No.Is Audit Adjustmentor Reclassification Required?Yes or NoReasons Why Audit Adjustment or Reclassification is Required or Not Required

1.YesCommissions paid to real estate agents are costs directly related to the acquisition of the property and should be included in the land cost. Costs of removing, relocating, or reconstructing property of others to acquire possession are costs that are directly attributable to conditioning the property for use and should be included in land costs. An adjustment is required for these items so that total land costs can properly be included in Property, Plant & Equipment.

2.NoNo adjustment is required because clearing costs are costs that are directly attributable to conditioning the property for use and should be included in land costs which are part of Property, Plant & Equipment.

3.YesSince clearing costs are costs of the land, amounts realized from the sale of materials recovered, such as timber and gravel, should be a reduction of the cost of the land and should not be recorded as other income.

4.YesAll costs relating to the purchase of machinery and equipment should be capitalized. For purchased items such costs would include invoice price, freight costs, and unloading charges. Royalty payments, however, should not be included in the cost of the machinery. Such payments should be charged to expenses as they accrue. The machinery costs, other than royalty payments, should be included in Property, Plant & Equipment.

17-25a. Substantive Testb. Financial Statement Assertionc. Type of Evidence

1.Vouch entries to retained earnings to board of director minutes.Existence or occurrence, rights and obligations, and valuation or allocationDocumentary

2.Vouch entries in long-term debt accounts to board of director minutesAll except presentationand disclosureDocumentary

3.Vouch to cash disbursements journal and recalculate bond interest Existence or occurrence, valuation or allocationMathematical

4.Vouch entries to brokers advice Existence or occurrence, valuation or allocationDocumentary

5.Inspect entries in cash disbursements journalExistence or occurrence, valuation or allocation

Documentary

6.Vouch to board of director authorization, and consider confirming with transfer agent.Existence or occurrence, valuation or allocationDocumentary, confirmation

7.Recalculateinterest expenseValuation or allocationMathematical

8.Inspect cash disbursements journal entry, supporting documentation and consider confirming with bond trustee.All except presentationand disclosureDocumentary, confirmation

9.Vouch to board of directors minutesPresentation and disclosureDocumentary

10.Vouch to board of director minutes and review authorizations and terms of stock issuesExistence or occurrence, valuation or allocation, rights and obligations, and presentation and disclosuresDocumentary

17-26.(Estimated time - 25 minutes)a.The substantive tests that Andrews should employ in examining the loans are as follows: Obtain an understanding of the business purpose of the loans made by the president. Confirm the loans, including terms, by direct communication. Re-compute (or verify) interest expense and interest payable. Re-compute the long-term and short-term portions of the debt. Review minutes of meetings of the board of directors for proper authorization. Verify payments made during the year and transactions after the year end. Read (notes to) the financial statements and the loan agreements, and evaluate the adequacy of disclosure and compliance with restrictions. Obtain a management representation letter.

b.Broadwall's financial statements should disclose the following information concerning the loans from its president: The nature of the related-party relationship The dollar amounts of the loans Amounts due to the president and, if not otherwise apparent, the terms and manner of settlement.

18-25.(Estimated time - 25 minutes)a.Several of the categories of internal control activities have been violated. Beberapa kategori aktivitas pengendalian internal yang dilanggar.: Pemisahan tugas (Segregation of duties). Bendahara melaksanakan transaksi, mencatat transaksi, dan menjaga aset yang dihasilkan. Hal ini sudah tepat bagi bendahara untuk melaksanakan transaksi sekuritas. Namun, petugas akuntansi yang seharusnya mencatat transaksi, dan petugas lain atau agen independen dari luar yang harus menjadi kustodian. Otorisasi yang tepat. Dewan direksi (atau dewan komite keuangan) harus mengotorisasi setiap pembelian dan penjualan sekuritas. Dokumen dan catatan. Sekuritas harus didaftarkan atas nama perusahaan. Kontrol akses. Tidak disebutkan tempat penyimpanan untuk sertifikat deposito. SD harus disimpan di kotak penyimpanan harta. Akses juga harus dibatasi kepada petugas yang berwenang. Pemeriksaan yang independenb.Pengujian substantif yang akan mendeteksi penyimpangan adalah (1) memeriksa dan menghitung sekuritas di tangan, (2) menjamin entri dalam rekening investasi, dan (3) menghitung ulang pendapatan yang diperoleh.18-26.(Estimated time - 25 minutes)

a. Substantive Testb. Financial Statement Assertionc. Type of Evidence

1.Recalculate revenue earnedValuation of allocationMathematical

2.Vouch entries in investment accounts to brokers advice.

All assertionsDocumentary

3.Confirm securities held by othersExistence or occurrence, completeness, rights and obligationsConfirmation

4.Inspect and count securities on handAll except rights and obligationsPhysical, documentary

5.Vouch entries in investment accounts to brokers advice.All assertionsDocumentary

6.Inspect and count securities on handAll except rights and obligationsPhysical, documentary

7.Review documentation concerning market valuesValuation or allocationDocumentary

8.Verify accuracy of balances, schedules and subsidiary ledgersValuation or allocationMathematical

9.Compare statement presentation with GAAPPresentation and disclosureDocumentary

10.Compare statement presentation with GAAPPresentation and disclosureDocumentary

18-30.(Estimated time - 30 minutes)

a.Patricia CompanyComputation of Amount Abstracted by CashierNovember 30, 20XO

Cash balance, per books November 30, 20XOAdd: Credit by bank$18,901.62 100.00

Adjusted cash balance (on hand and in bank)$19,001.62

Less adjusted bank balance: Bank balance, November 30, 20XOLess outstanding checks:$15,550.00

62$116.25

182150.00

284253.25

8621190.71

8623206.80

8632 145.281,062.2914,487.71

Cash which should be on hand for depositCash reported$ 4,513.91 3,794.41

Amount of theft$ 719.50

b.The cashier removed $719.50. He attempted to conceal his theft by: Not listing all outstanding checks. Underfooting outstanding checks shown on the reconciliation. Subtracting an item from the bank balance that should be added to book balance.

c.Two controls that were lacking are: Someone other than the cashier should trace cash receipts to the deposits in the bank Someone other than the cashier should be responsible for preparing bank reconciliation.