GEN COMBO LL PRINCIPLES OF AUDITING & OTHER ASSURANCE SERVICES; CONNECT AC
21st Edition
ISBN: 9781260427202
Author: Ray Whittington, Kurt Pany
Publisher: McGraw-Hill Education
expand_more
expand_more
format_list_bulleted
Question
Chapter 13, Problem 31QRA
a.
To determine
Explain the difficulty in the fair valuation.
b.
To determine
Explain the process of auditing the impairment loss in the given situation.
c.
To determine
Explain the responsibilities with respect to using the specialist’s work.
d.
To determine
Provide two estimates of the fair value of its recently purchased franchise location.
e.
To determine
Provide the type of evidence that would be expectedto examine the assumptions explained in d.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
For several years, a number of Food Lion, Inc. , grocery stores were unprofitable. The companyclosed some of these locations. It was apparent that the company would not be able to recover thecost of the assets associated with the closed stores. Thus, the current value of these impaired assetshad to be written down.A note in the financial statements indicated that the company tests assets for impairment when
circumstances indicate that an impairment may exist. For impairment testing, each store is con-sidered a cash-generating unit. Stores with potential impairments are tested by comparing their
carrying value with their recoverable amounts.a. Explain why Food Lion wrote down the current carrying value of its unprofitable stores.b. Explain why the write-down of impaired assets is considered a noncash expense.
You are auditing Army Corporation's financial statements for the period ended December 31, 2021. Army Corporation is engaged in several lines of businesses: developing property for sale; holding real estate property for rental purposes and holding real estate properties for capital appreciation purposes. Four properties are currently classified as investment property. Your audit investigations revealed the following regarding the said properties:
Real Property A was acquired in January of 2020 at P100M. The building's sewerage system was not operating and Army Corporation decided to incur expenditure amounting to P5M to make the sewerage system operational. It also decided to undertake major maintenance on the system at the end of 5 years. The company used the fair market model for this asset and has capitalized the asset at P115M (being the cost of P100M, expenditure of P5M and the present value of the planned expenditure at the end of five years at P10M). Fair value of the property…
The accountant of Swift Inc. was preparing for the audit of its financial statements for the year ended December 31, 2022, and discovered that an automobile was being incorrectly depreciated. The automobile was purchased on January 1, 2021, for $50,000 and the estimated residual value after five years was expected to be $5,000.
The company uses the straight-line basis for depreciating vehicles, but the residual value was not considered when determining the depreciation amount. The financial controller informed the accountant that the company was switching to the double- declining balance method of depreciation for the current and future years, as it was believed this method would more accurately portray the consumption of benefits received from the asset's use.
Required: State whether it is a change in accounting estimate/policy or an accounting error. Prepare the journal entries required on December 31, 2022. Ignore income tax effects. Show all workings
Chapter 13 Solutions
GEN COMBO LL PRINCIPLES OF AUDITING & OTHER ASSURANCE SERVICES; CONNECT AC
Ch. 13 - Prob. 1RQCh. 13 - K-J Corporation has current assets of 5 million...Ch. 13 - Prob. 3RQCh. 13 - Prob. 4RQCh. 13 - Explain the use of a system of authorizations for...Ch. 13 - Moultrie Company discovered recently that a number...Ch. 13 - Does a failure to record the retirement of...Ch. 13 - Prob. 8RQCh. 13 - Prob. 9RQCh. 13 - Prob. 10RQ
Ch. 13 - Prob. 11RQCh. 13 - Prob. 12RQCh. 13 - Prob. 13RQCh. 13 - Prob. 14RQCh. 13 - Prob. 15RQCh. 13 - Gibson Manufacturing Company acquired new factory...Ch. 13 - Prob. 17RQCh. 13 - Do the auditors question the service lives adopted...Ch. 13 - Prob. 19RQCh. 13 - Explain how the existence of lease agreements may...Ch. 13 - Prob. 21RQCh. 13 - Prob. 22QRACh. 13 - Prob. 23QRACh. 13 - Gruen Corporation is a large diversified company...Ch. 13 - Prob. 25QRACh. 13 - Prob. 26QRACh. 13 - Prob. 27QRACh. 13 - Prob. 28QRACh. 13 - Prob. 29QRACh. 13 - Prob. 30QRACh. 13 - Prob. 31QRACh. 13 - To assure accountability for fixed-asset...Ch. 13 - Prob. 32BOQCh. 13 - Which of the following is an internal control...Ch. 13 - Which of the following accounts should be reviewed...Ch. 13 - Prob. 32EOQCh. 13 - Prob. 32FOQCh. 13 - Which of the following statements is not typical...Ch. 13 - Prob. 32HOQCh. 13 - Prob. 32IOQCh. 13 - An effective procedure for identifying unrecorded...Ch. 13 - Which of the following is not an overall test of...Ch. 13 - Prob. 32LOQCh. 13 - Prob. 33OQCh. 13 - Analysis of which account is least likely to...Ch. 13 - Prob. 34BOQCh. 13 - Prob. 34COQCh. 13 - Prob. 34DOQCh. 13 - A search for overstated property, plant, and...Ch. 13 - The following are typical questions that might...Ch. 13 - Prob. 36PCh. 13 - Prob. 37PCh. 13 - Chem-Lite, Inc., maintains its accounts on the...Ch. 13 - Prob. 39PCh. 13 - You are reviewing the property, plant, and...
Knowledge Booster
Similar questions
- For the following independent situations, assume that you are the audit partner on the engagement: 1. The client recorded impairment of goodwill for $40,000 last year. It recorded reversal of impairment in goodwill for $20,000 this year after considering the carrying amount and recoverable amount of the cash generating unit. Net income is $10,000 in current year. Discuss the most appropriate type of opinion the auditor should issue. Explain briefly the reason for the opinion.arrow_forwardFor every of the following independent situation, discuss the issue and describe the impact on the audit record with provide examples i. During the audit, the crew discovers that one of the five improvement projects, valued at RM880,000 and included as intangible assets, does no longer meet the criteria for capitalisation. The finance director does not intend to alternate the accounting remedy adopted as she considers this an immaterial quantity.arrow_forwardThe first audit of the books of Swift Limited was recently carried out for the year ended December 31, 2021. Swift follows IFRS. In examining the books, the auditor found that certain items had been overlooked or might have been incorrectly handled in the past: 1. At the beginning of 2019, the company purchased a machine for $480,000 (residual value of $30,000) that had a useful life of six years. The bookkeeper used straight-line depreciation but failed to deduct the residual value in calculating the depreciation base for the three years. 2. Swift purchased another company early in 2017 and recorded goodwill of $450,000 Swift amortized $20,000 of goodwill in 2017, and $40,000 in each subsequent year. The tax treatment for goodwill was properly applied. Assuming the company has a tax rate of 20% Instructions a. Prepare the journal entries in 2021 to correct the books where necessary, assuming that the 2021 books have not been closed. b. Identify the type of change for each of the…arrow_forward
- Mike Crane is an audit senior of a large public accounting firm who has just been assigned to the Frost Corporation's annual audit engagement. Frost has been a client of Crane's firm for many years. Frost is a fast-growing business in the commercial construction industry. In reviewing the fixed asset ledger, Crane discovered a series of unusual accounting changes, in which the useful lives of assets, depreciated using the straight-line method, were substantially lowered near the midpoint of the original estimate. For example, the useful life of one dump truck was changed from 10 to 6 years during its fifth year of service. Upon further investigation, Mike was told by Kevin James, Frost's accounting manager, “I don't really see your problem. After all, it's perfectly legal to change an accounting estimate. Besides, our CEO likes to see big earnings!” Instructions Answer the following questions. a. What are the ethical issues concerning Frost's practice of changing the useful lives of…arrow_forwardAs the engagement partner, you have reviewed the audit working papers of Royal Height Limited. The audit team has highlighted the following matters in the working papers: Thirty percent of the companys recorded turnover (revenue) comprises of cash sales. Proper records of cash sales have not been maintained. Consequently, the audit team was unable to design audit procedures to verify the cash sales. During the current year, the company changed the method of charging depreciation on its fixed assets from the straight line to the diminishing balance method. However, all the required disclosures have been included in the notes to the financial statements. Required: Discuss the impact of each of the above matters on your audit report.arrow_forwardIn the audit of the Property, Plant and Equipment account of Bim Co., you have noticed that the depreciation methods used in years 1-3 (double Declining) of operations have been different with what the company has been using from 4th to 6th (150% declining balance) year. On the 7th year, the year of audit, the company has agreed to use the straight-line depreciation method for the current and following years. There was no other acquisition or disposition of PPE during the years. As an auditor, you would most likely recommend that *A. The company use a current and prospective approach in accounting for its depreciation using the double-declining balance method, the original depreciation method used.B. The company use a current and prospective approach in accounting for its depreciation using the straight-line method of depreciation.C. The company adjust its retained earnings retrospectively to adhere to the adjusted computation of accumulated depreciation using the straight-line method…arrow_forward
- The Tenth National Bank had taken possession of a shopping mall in foreclosure of a mortgage. When the mall was inspected prior to being sold by the bank to a real estate company, it was discovered that it had extensive asbestos problems. An estimate indicated that it would cost $1 million to remove the asbestos. The bank has also purchased an office building for its headquarters. The building was inspected before the purchase and a similar asbestos problem was discovered. An estimate indicated that it would cost $2 million to remove the asbestos, and the bank completed the purchase. The bank’s president has asked you how to account for these transactions. Directions: 1. Research the related generally accepted accounting principles and prepare a short memo to the president that answers her question. Cite your references and applicable paragraph numbers. 2. Does this situation create ethical issues?arrow_forwardXYZ Company has long owned a manufacturing site that has now been discovered to be contaminated with toxic waste. The entity has acknowledged its responsibility for the contamination. An initial clean up feasibility study has shown that it will cost at least P500,000 to clean up the toxic waste. During the current year, the entity has been sued for patent infringement and lost the case. A preliminary judgment of P300,000 was issued and is under appeal. The entity’s attorney agrees that it is probable that the entity will lose this appeal. What amount of provision should be accrued as liability? a. 0 b. 800,000 c. 500,000 d. 300,000arrow_forwardThe first audit of the books of Sweet Company was made for the year ended December 31, 2021. In examining the books, the auditor found that certain items had been overlooked or incorrectly handled in the last 3 years. These items are: 1. At the beginning of 2019, the company purchased a machine for $534,000 (salvage value of $53,400) that had a useful life of 6 years. The bookkeeper used straight-line depreciation but failed to deduct the salvage value in computing the depreciation base for the 3 years. 2. At the end of 2020, the company failed to accrue sales salaries of $42,000. 3. A tax lawsuit that involved the year 2019 was settled late in 2021. It was determined that the company owed an additional $90,000 in taxes related to 2019. The company did not record a liability in 2019 or 2020 because the possibility of loss was considered remote, and charged the $90,000 to a loss account in 2021. 4. Sweet Company purchased a copyright from another company early in 2019…arrow_forward
- The first audit of the books of Headland Company was made for the year ended December 31, 2021. In examining the books, the auditor found that certain items had been overlooked or incorrectly handled in the last 3 years. These items are: 1. At the beginning of 2019, the company purchased a machine for $555,000 (salvage value of $55,500) that had a useful life of 6 years. The bookkeeper used straight-line depreciation but failed to deduct the salvage value in computing the depreciation base for the 3 years. 2. At the end of 2020, the company failed to accrue sales salaries of $49,000. 3. A tax lawsuit that involved the year 2019 was settled late in 2021. It was determined that the company owed an additional $87,000 in taxes related to 2019. The company did not record a liability in 2019 or 2020 because the possibility of loss was considered remote, and charged the $87,000 to a loss account in 2021. 4. Headland Company purchased a copyright from another company early in…arrow_forwardThe first audit of the books of Windsor Company was made for the year ended December 31, 2021. In examining the books, the auditor found that certain items had been overlooked or incorrectly handled in the last 3 years. These items are: 1. At the beginning of 2019, the company purchased a machine for $528,000 (salvage value of $52,800) that had a useful life of 6 years. The bookkeeper used straight-line depreciation but failed to deduct the salvage value in computing the depreciation base for the 3 years. 2. At the end of 2020, the company failed to accrue sales salaries of $49,000. 3. A tax lawsuit that involved the year 2019 was settled late in 2021. It was determined that the company owed an additional $81,000 in taxes related to 2019. The company did not record a liability in 2019 or 2020 because the possibility of loss was considered remote, and charged the $81,000 to a loss account in 2021. 4. Windsor Company purchased a copyright from another company early in…arrow_forwardThe following paragraphs describe fraudulent accounting committed by the company Rite-Aid in 1999. After reading the paragraphs, list the journal entries you think Rite-Aid would have used to do what is described here. You will have to make an educated guess as to what journal entries the company would use to cover up the fraud. Rite Aid retroactively increased the estimated lives (periods of time) over which some groups of assets were depreciated. These retroactive depreciation changes violated GAAP, which requires such changes to be done prospectively. There was no legitimate business purpose or supporting documentation for these changes. The effect of the retroactive depreciation changes resulted in increases to income, and caused some asset groups to have a negative depreciation expense. These changes resulted in an approximately $14.6 million overstatement of FY 1998 pre-tax income.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Auditing: A Risk Based-Approach (MindTap Course L...AccountingISBN:9781337619455Author:Karla M Johnstone, Audrey A. Gramling, Larry E. RittenbergPublisher:Cengage Learning
Auditing: A Risk Based-Approach (MindTap Course L...
Accounting
ISBN:9781337619455
Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg
Publisher:Cengage Learning