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.
Category
Initial
Procedure
s

Substantive Test
1) 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

Specific Audit
Objectives
All

Category

Substantive Test

2)

interest entities and operating leases to finance assets.

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.
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 turnover
ii) Depreciation expense as a percent of sales
iii) Repair and maintenance expense as a percent of sales
iv) Rate of return on assets
c) Analyze ratio results relative to expectations based on prior
years, industry data, budgeted amounts, or other data.
Vouch plant asset additions to supporting documentation.
Vouch plant asset disposals to supporting documentation.
Vouch a sample of entries to repairs and maintenance expense.
Vouch the recording of new capital lease and operating leases to
underlying contracts.

Analytical
Procedure
s

3)

Tests of
Details of
Transactio
ns

4)
5)
6)
7)

Tests of
Details of
Balances

8) 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 contracts
10) 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.

Tests of
Details of
Accountin
g
Estimates
Tests of

12) Compare statement presentation with GAAP.

Specific Audit
Objectives
VA4
EO1, EO4

VA4

VA4

All

EO1, VA1, PD1, EO4,

VA4
EO2, VA2, PD2, EO4,
VA4
EO3, VA3, PD3, EO4,
VA4
EO1, C1, VA1, PD1
EO4
EO4, C1, C2, C4

RO1
VA5
VA6

Category
Details of
Presentati
on and
Disclosure

b.

Substantive Test
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.

1.

Is Audit Adjustment
or Reclassification
Required?
Yes or No
Yes

2.

No

3.

Yes

4.

Yes

Item No.

17-25

Specific Audit
Objectives
PD4, PD7
PD4, PD7

PD5

PD6

Reasons Why Audit Adjustment or Reclassification

is Required or Not Required

Commissions 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.
No 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.
Since 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.
All 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.

1.

2.

3.

4.
5.

6.

7.
8.

9.
10.

a. Substantive Test

b. Financial Statement Assertion

Vouch entries to retained

earnings to board of director
minutes.
Vouch entries in long-term
debt accounts to board of
director minutes
Vouch to cash disbursements
journal and recalculate bond
interest
Vouch entries to brokers
advice
Inspect entries in cash
disbursements journal

Existence or occurrence, rights and

obligations, and valuation or allocation

Vouch to board of director

authorization, and consider
confirming with transfer agent.
Recalculate
interest expense
Inspect cash disbursements
journal entry, supporting
documentation and consider
confirming with bond trustee.
Vouch to board of directors
minutes
Vouch to board of director
minutes and review
authorizations and terms of
stock issues

c. Type of
Evidence
Documentary

All except presentation

and disclosure

Documentary

Existence or occurrence, valuation or

allocation

Mathematical

Existence or occurrence, valuation or

allocation
Existence or occurrence, valuation or
allocation

Documentary

Existence or occurrence, valuation or

allocation

Documentary,
confirmation

Valuation or allocation

Mathematical

All except presentation

and disclosure

Documentary,
confirmation

Presentation and disclosure

Documentary

Existence or occurrence, valuation or

allocation, rights and obligations, and
presentation and disclosures

Documentary

Documentary

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:

18-25.
a.

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.

(Estimated time - 25 minutes)

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 independen

b.

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 Test
1.
2.

Recalculate revenue earned

Vouch entries in investment
accounts to brokers advice.

3.

Confirm securities held by

others

4.

Inspect and count securities

on hand
Vouch entries in investment
accounts to brokers advice.
Inspect and count securities
on hand
Review documentation
concerning market values
Verify accuracy of balances,
schedules and subsidiary
ledgers
Compare statement
presentation with GAAP

5.
6.
7.
8.

9.

b. Financial Statement
Assertion
Valuation of allocation
All assertions

c. Type of
Evidence
Mathematical
Documentary

Existence or occurrence,
completeness, rights and
obligations
All except rights and obligations

Confirmation

All assertions

Documentary

All except rights and obligations

Physical, documentary

Valuation or allocation

Documentary

Valuation or allocation

Mathematical

Presentation and disclosure

Documentary

Physical, documentary

10.

Compare statement
presentation with GAAP

Presentation and disclosure

Documentary

18-30. (Estimated time - 30 minutes)

a.
Patricia Company
Computation of Amount Abstracted by Cashier
November 30, 20XO
Cash balance, per books November 30, 20XO
Add: 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, 20XO
Less outstanding checks:
$15,550.00

62
182
284
8621
8623
8632
Cash which should be on hand for deposit
Cash reported
Amount of theft

$116.25
150.00
253.25
190.71
206.80
145.28

1,062.29

b.

The cashier removed $719.50. He attempted to conceal his theft by:

o Not listing all outstanding checks.
o Underfooting outstanding checks shown on the reconciliation.
o Subtracting an item from the bank balance that should be added to book balance.

c.

Two controls that were lacking are:

o Someone other than the cashier should trace cash receipts to the deposits in the
bank
o Someone other than the cashier should be responsible for preparing bank
reconciliation.

14,487.71
$ 4,513.91
3,794.41
$ 719.50