Answered: You have to test cash and PP&E of your…

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter4: Time Value Of Money

Section: Chapter Questions

Problem 1cM

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Question

You have to test cash and PP&E of your client. Both accounts have the same balance at the end of the year: $25 million. In a typical company, which account will you spend more time testing AND WHY?

Expert Solution

Step 1

Both accounts are material wity respect to audit.
But as an auditor, PP&E account will be more focused area.
To audit PPE, it is very important to perform proper audit procedures in order to obtain sufficient appropriate audit evidence for making a proper conclusion on PPE accounts.
The inherent risk of PPE is that the client may over overstate the balance by including fictitious assets or capitalize the costs, such as repair and maintenance costs, which should be the expense.
In Audit of PP&E,following Audit assertions for taken care of:

Existence.

Valuation.

Completeness.

Rights and obligations.