Question

The Managing Director of your chosen company instructs the accountant to lengthen assets lives to reduce depreciation expense. An equipment purchased in January 2013, was originally estimated to have a useful life of 8 years. The Managing Director wants the estimated life changed to 15 years. The accountant is hesitant to make the change, believing it is unethical to increase profit in this manner. However, Managing Directors says him, ‘The life is only an estimate, and I’ve heard that our competitors use a 15-year life on their equipment.’ Is the proposed changed in asset life unethical, or is it simply a good business practice by an astute Managing Director? Explain.

Answer 1

When the auditor verifies fixed assets, he should perform two way test i.e., test some items from accounting records to physical and some items form physical to accounting records.

The objective of checking accounting records to physical is to ven; existence assertion. If there are differences the matter should investigated. The write off should be authorized. The objective of checking physical to account records is to verify that assets acquired are recorded.

Evidence that may be inspected for existence assertion of investments include:
1. Physical inspection
2. Bank confirmation for investments held as mortgage or safe custody
3. Receipt of dividend

List some control fixed relating to fixed assets

1. Non existent fixed assets included in balance sheet
2. Fixed assets may exist but not included in balance sheet
3. Unauthorized purchased and disposals
4. Proceeds form disposals misappropriated
5. Fixed assets may not be owned by the entity.
6. Fixed assets mortgaged against loans not disallowed
7 Capital and revenue expenditure incorrectly classified
8 Inconsistent depreciation policy
9 Inadequate depreciation