Chapter 12, Problem 52RSCQ

To determine

Introduction: A substantive procedure is a process or step performed by an auditor to collect sufficient and appropriate evidence regarding the completeness, accuracy, occurrence of a transaction or event.

Analytical procedure:It is one of the methods in the audit process in which the auditor analyze the business of the client and also verify the changes and risks involved in it. This procedure helps to plan the substantive procedures required for auditing the financial statements.

Whether the depreciation recorded is correct or not and also determine the impact of this on the substantive procedure.

Calculation of depreciation after evaluating the assets is as below:

Salvage value=10% of original cost

$\begin{array}{l}\text{Depreciation expense}=\frac{\text{Ending balance of equipment}-\text{Salvage value}}{\text{Useful life}}\\ \text{ =}\frac{\$438,900-\$43,890}{6}\\ \text{ =\$65,835}\end{array}$

Thus, the depreciation expense should be $65,835 instead of $60,500. So, depreciation recorded is lower than the actual amount and it should be rectified.

As this was part of the analytical process and there is a difference in the depreciation expense so, the auditor should plan the substantive procedure accordingly and should mainly focus on detailed verification of depreciation expense and asset value.The auditor should thoroughlycheck the accounts so that other discrepancies could be rectified attime.