Question

In auditing depreciation expense, what major considerations should the auditor keep in mind? Explain how each can be verified.?

Answer 1

Solution:-

The three considerations to be kept in mind in auditing depreciation expense are:

1. Whether the client is following a consistent depreciation policy from period to period (GAAP).
2. The reasonableness of accounting estimates made in relate to PPE (useful life and residual value)
3. The accuracy of the client's calculations.

An overall reasonableness test can be made by calculating the depreciation rate for the year times the undepreciated (or historical costs) fixed assets. In addition, it is desirable to check the accuracy of the depreciation calculation. The extent of the accuracy tests will vary depending on the engagement circumstances.