Question

Question 5

Using your firm’s sampling technique, you have selected representative sample of Property, Plant and Equipment (PPE) items from the asset register. You have decided to use this sample to test whether the depreciation rate assigned to PPE is appropriate and in line with the present condition and expected use over the remaining life of each sample item. The relevant details of the sample selection and results of your test are summarised below:

Profit before tax	$1,875,000
PPE account balance	$11,345,000
Sample size	35
Dollar value of sample taken	$1,145,000
Error in the sample (depreciation rates for some Items were too low and/or remaining useful Life to equipment was overstated)	$48,500

Required:

1. What conclusion would you draw about ‘valuation and allocation’ of PPE from the above information? Justify your conclusion.                                                                                               
2. Assuming that management refuses to amend the error, discuss the impact of the above information on your audit opinion.                                                                                                 

Answer 1

a. Given PPE balance is $11,345,000 and the sample size is 35 and the value of the sample is $1,145,000. The errors the auditors noticed is the depreciation for some items is very low and/ or remaining life of the equipment was an overstatement. This describes the improper valuation of the PPE and improper allocation of depreciation on the PPE.

b. If the management refuses to do changes then the assets of the company to be misstated and it leads to the misrepresentation of true and fair view of financial statements. This effects the auditors opinion adversely.