Pasig Catholic College

Persons of Character and Competence

COLLEGE DEPARTMENT
SY 2021-2022
PCC @ 109: “Missio et Evangelizatio”
OPERATIONS AUDITING
COURSE CODE: ACCTG_116
STUDENT NO.: 16-9094 DATE: 10 September 2021
NAME: LANDAOS, Ivanriche L. PROGRAM/YR. LV.: BSA-4
ACCOUNTING 116
ACTIVITY FOR THE DAY

Audits of financial statements are designed determine whether account balances are
materially correct. Assume that your client is a construction company that has the
following assets on its balance sheet: • Construction equipment: $ 1,278,000 •
Accumulated depreciation: $386,000 • Leased construction equipment: $550,000
a. Describe a substantive audit procedure that can used to determine that all leased
equipment that should have been capitalized during the year was actually capitalized
(as opposed to being treated as a lease expense)
b. The construction equipment account shows that the company purchased
approximately $400,000 of new equipment this year. Identify a substantive audit
procedure that will determine whether the equipment account was properly accounted
for during the year.
c. Assuming the auditor determines the debits to construction equipment were proper
during the year, what other information does the auditor need to know to have
reasonable assurance that the construction equipment - net of depreciation – is properly
reflected on the balance sheet?
d. How can an auditor determine that the client has assigned an appropriate useful life
to the equipment and has depreciated it accurately?

Answer:
a.) Leases can be accounted for in two different ways. If the lessor (or owner)
grants the lessee the right to utilize the property, it is called an operational
lease. The lessee is responsible for returning the property to the lessor
after the lease term. For this reason, leasing expenses are accounted for

That in all things, God may be glorified!

 Pasig Catholic College
Persons of Character and Competence
COLLEGE DEPARTMENT
SY 2021-2022
PCC @ 109: “Missio et Evangelizatio”
as operational expenses on an income statement and do not affect a
company’s balance sheet. Lessors who take on capital leases take on
some of the risks of ownership while also enjoying some of the rewards.
Due to this, the balance sheet shows the lease as an asset and a liability
(due to the lease payments). Depreciation is claimed each year on the
asset, and the interest expense component of the lease payment is
deducted annually. Capital leasing is generally recognized as a more
expensive kind of financing than operational leasing.
It’s a no-brainer for companies to record all leases as operating leases
since corporations prefer to keep leases off their books and delay costs.
Financial Accounting Standards Board has thus determined that any lease
that meets one of the following four requirements is to be considered as
an asset lease.
(a) Leases that surpass 75% of the asset’s life
(b) Transfer of ownership to the lessee at lease’s conclusion
(c) If there is a “bargain price” option to purchase the asset after the lease
period.
(d) As long as the present value of the lease payments, after discounting
them at a reasonable rate, exceeds ninety percent of its fair market value.
To determine if a lease is capital or operational, the lessor applies the
same criterion. The lessor then accounts for the lease following its
classification. There are two ways to report revenue and costs in a capital
lease. Also, the lease receivable is reflected on the balance sheet, and the
interest revenue is recorded as it accrues.
When it comes to tax benefits, a lessor can only claim them for an
operational lease, even if the revenue code utilizes somewhat different
criteria.

b.) First, the construction account must be verified. Ask for a copy of the
construction register or a comprehensive breakdown schedule of the
equipment, if you are an auditor. Particular elements should be identified
and checked concerning the $400,000 balance on the balance sheet. It is
the responsibility of a company’s management to personally inspect the

That in all things, God may be glorified!

 Pasig Catholic College
Persons of Character and Competence
COLLEGE DEPARTMENT
SY 2021-2022
PCC @ 109: “Missio et Evangelizatio”
plant and machinery, while the auditor should request the relevant
operating papers for his investigation. Referencing invoices and other
applicable documents, verify the year-end additions and subtractions. The
auditor should test-check some of the essential things in the plant.
Invoices from the supplier and other supporting documentation will be
used to verify the cost of any construction and installation costs. In
addition, the auditor should check to determine if sufficient depreciation
was taken throughout the course of the year. Supposing that it has been
approved, the sale profits should be deposited into his construction
account. A portion of any capital gains should be put into a reserve. The
auditor should also verify that the construction has been correctly
recorded in the balance sheet under fixed assets.

c.) The original recorded amount (cost), the projected salvage value, the
anticipated usable life, and the depreciation method all play a role in
determining the yearly depreciation for a depreciable asset. Assets are
normally recorded at their purchase cost, which is usually objectively
determinable in the majority of circumstances. The attribution of costs to
“basket purchases” and the selection of an implicit interest rate in asset
acquisition under deferred payment arrangements, on the other hand, may
involve substantial judgment in some circumstances and may be highly
subjective. The salvage value is an estimate of the money that might be
recouped after the item is retired. In addition to the asset’s lifespan, the
estimate is dependent on the judgment and influenced by it.

d.) They should check whether or not all construction and leasing equipment
has been recorded, including the item’s kind, cost, and location as well as
a code number. He should also check to see if the objects have the
assigned code number. Inquire as to whether or not the management has
physically checked the construction and rented equipment, and if so,
review the operating records. When testing critical construction and leased
equipment, the auditor should physically verify them.

That in all things, God may be glorified!

 Pasig Catholic College
Persons of Character and Competence
COLLEGE DEPARTMENT
SY 2021-2022
PCC @ 109: “Missio et Evangelizatio”
VICENCIO, JANENIEL D.
Bsa-4

ACCOUNTING 116
ACTIVITY FOR THE DAY

Audits of financial statements are designed determine whether account balances are
materially correct. Assume that your client is a construction company that has the
following assets on its balance sheet: • Construction equipment: $ 1,278,000 •
Accumulated depreciation: $386,000 • Leased construction equipment: $550,000
a. Describe a substantive audit procedure that can used to determine that all leased
equipment that should have been capitalized during the year was actually capitalized
(as opposed to being treated as a lease expense)
- A substantive audit procedure that can be used to determine that all leased equipment that
should have been capitalized during the year was capitalized is to check or inspect the fixed
asset that has been registered to see whether the leased equipment has been recorded. After
that procedure check the profit and loss account if any lease expenses are reflected and as well
as the depreciation account that is taking into account lease equipment while calculating the
depreciation. The balance sheet should Show the net figure after considering leased
equipment.
b. The construction equipment account shows that the company purchased
approximately $400,000 of new equipment this year. Identify a substantive audit
procedure that will determine whether the equipment account was properly accounted
for during the year.
-A substantive audit procedure that should be done to determine whether the equipment
account was properly accounted for during the year is to review the invoices of the purchased
equipment and check if the amount and date are the same as what is recorded.
c. Assuming the auditor determines the debits to construction equipment were proper
during the year, what other information does the auditor need to know to have

That in all things, God may be glorified!

 Pasig Catholic College
Persons of Character and Competence
COLLEGE DEPARTMENT
SY 2021-2022
PCC @ 109: “Missio et Evangelizatio”
reasonable assurance that the construction equipment - net of depreciation – is properly
reflected on the balance sheet?
-The information that the auditor needs to know to have reasonable assurance that the
construction equipment - net of depreciation – is properly reflected on the balance sheet is to
check if the depreciation method chosen is right and the useful life salvage is correct. Also,
check if no impairment value has occurred to the asset.
d. How can an auditor determine that the client has assigned an appropriate useful life
to the equipment and has depreciated it accurately?
- The auditor can determine if the client has assigned an appropriate useful life to the
equipment and has depreciated it accurately by checking the company’s history if there is a
history regarding recognizing gain or losses on their trade-in therefore their estimation on the
useful life is either too short or too long.

That in all things, God may be glorified!

 Pasig Catholic College
Persons of Character and Competence
COLLEGE DEPARTMENT
SY 2021-2022
PCC @ 109: “Missio et Evangelizatio”
Mercado, Roselle G.
BSA-4
ACCTG 116
September 10, 2021

Audits of financial statements are designed determine whether account balances are
materially correct. Assume that your client is a construction company that has the
following assets on its balance sheet: • Construction equipment: $ 1,278,000 •
Accumulated depreciation: $386,000 • Leased construction equipment: $550,000
a. Describe a substantive audit procedure that can used to determine that all leased
equipment that should have been capitalized during the year was capitalized (as
opposed to being treated as a lease expense)

 The auditor will inspect to see if the fixed assets are registered and if
so, is it recorded? After that, he will check the profit and loss account
to see if it has a record of any lease expense and a depreciation
account that is taken into the leased equipment account. The balance
sheet should show the net figure amount of the leased equipment after
calculating the depreciation. The auditor would also check the bank
account if the said amount were existing and the vendor or supplier
from which it is purchased. He will also cross-check the date and price
of the asset and the depreciation schedule to see if the depreciation is
charged separately. He would also examine relevant documents
related to the assets, the company’s policies when the assets are
purchased, and the calculation of depreciation.

b. The construction equipment account shows that the company purchased

approximately $400,000 of new equipment this year. Identify a substantive audit
procedure that will determine whether the equipment account was properly
accounted for during the year.

That in all things, God may be glorified!

 Pasig Catholic College
Persons of Character and Competence
COLLEGE DEPARTMENT
SY 2021-2022
PCC @ 109: “Missio et Evangelizatio”
 The auditor should make a random review of the invoices of the new
equipment purchased and makes sure that the amount paid on the
invoices and the amount recorder for the equipment are matched.

c. Assuming the auditor determines the debits to construction equipment were

proper during the year, what other information does the auditor need to know to
have reasonable assurance that the construction equipment - net of depreciation
– is properly reflected on the balance sheet?

 The auditor should make sure the appropriate depreciation method was
chosen and the useful life salvage value is correct, and no value
impairment has occurred to the asset.
d. How can an auditor determine that the client has assigned an appropriate useful
life to the equipment and has depreciated it accurately?

 If a company has a history of recognizing gains or losses on their trade-

ins, then their useful life estimation is either too short or too long.

That in all things, God may be glorified!