Question

Sinha Airways owns many of its aircraft. The useful lives and residual values may be influenced by external changes to economic conditions, demand, and new technology. Analytical procedures show that depreciation expense is down by 8% compared to prior years.

Required:

• Evaluate inherent risk for depreciation expense.
• Discuss what can go wrong.

Answer 1

The reduction of depreciation expense may be due to:

1. Change in depreciation method

2.Change in estimates of fixed assets useful life

3.Disposal of fixed assets

Auditors need to review the impact of the above factors on the depreciation expenses

Auditors need to ensure compliance with accounting standards for depreciation methods and correctness of estimates of useful life

The inherent risk of depreciation expense is impacting both Balance Sheet and Income Statement.

Understatement of depreciation expense will result in overstatement of profit and also overstatement of Fixed Assets.