c . What types of evidence would you examine to support equipment disposals?

d. What procedures would you perform related to the ending balances in the accounts?
e . In the audit of property, plant, and equipment accounts, auditors should consider
whether there are any implications to other accounts in the audit.
(1) What other accounts might be impacted by the additions of buildings and
equipment?
(2) What other accounts might be impacted by disposals of equipment?
19-25 (Objective 19-4) The following program has been prepared for the audit of accrued
real estate taxes of a client that pays taxes on 25 different pieces of property, some of
which have been acquired in the current year:
1. Obtain a schedule of accrued taxes from the client and tie the total to the general
ledger.
2. Compare the charges for annual tax payments with property tax assessment bills.
3. Recompute accrued/prepaid amounts for all bills on the basis of the portion of the
year expired.
a . State the purpose of each procedure. Required
b . Evaluate the adequacy of the audit program.
19-26 (Objective 19-4) As part of the audit of different audit areas, auditors should be
alert for the possibility of unrecorded liabilities. For each of the following audit areas or
accounts, describe a liability that can be uncovered and the audit procedures that can
uncover it:
a . Minutes of the board of directors meetings e . Cash surrender value of life insurance
b . Land and buildings f . Cash in the bank
c . Rent expense g . Officers’ travel and entertainment
d. Interest expense expenses
19-27 (Objective 19-5) You are auditing the financial statements of Austin Software
Company, which is a fast-growing software development company. As part of the company’s
strategy, management has been aggressively pursuing acquisitions of other companies.
Some of the prior acquisitions resulted in the recording of goodwill. During your review
of income and expense accounts, you noted a material goodwill impairment charge
associated with the company’s acquisition of Longhorn Software, Inc.
As part of your audit, consider each of the following: Required
a . What are the underlying accounting standards requirements that are relevant to
your evaluation of the company’s charge for the impairment of goodwill?
b . What types of evidence would be relevant to your evaluation of whether manage-
ment’s impairment charge is fairly stated?
c . How might the use of a business valuation specialist be helpful in this year’s audit?

CASES
Ward Publishing Company — Part III (See Case 18-32 for Parts I and II)
19-28 (Objectives 19-1, 19-2, 19-5) Examine the tests of controls and substantive tests of
transactions results, including the sampling application in Case 18-32 (pp. 623–624), for
Ward Publishing Company. Assume that you have already reached several conclusions.
1. Your tests of details of balances for accounts payable are completed, and you found
no exceptions.
2. Acceptable audit risk for property, plant, and equipment and all expenses is high.
3. Inherent risk for property, plant, and equipment is high because in the current year,
the client has acquired a material amount of new and used printing equipment and has
traded in older equipment. Some of the new equipment was ineffective and returned;
an allowance was received on others. Inherent risk for expense accounts is low.
4. New computer equipment and some printing equipment are being leased. The
client has never leased equipment before.

Chapter 19 / COMPLETING THE TESTS IN THE ACQUISITION AND PAYMENT CYCLE 647
 5. Analytical procedures for property, plant, and equipment are inconclusive because
of the large increases in acquisition and disposal activity.
6. Analytical procedures show that repairs, maintenance, and small tools expenses
have increased materially, both in absolute terms and as a percentage of sales. Two
other expenses have also materially increased, and one has materially decreased.
7. In examining the sample for tests of controls and substantive tests of transactions,
you observe that no sample items included any property, plant, and equipment or
lease transactions.
Required a . Explain the relationship between the tests of controls and substantive tests of trans-
actions results in Case 18-32 and the audit of property, plant, and equipment and
leases.
b . How will the tests of controls and substantive tests of transactions results and your
conclusions (1 through 7) affect your planned tests of details for property, plant,
and equipment and leases? State your conclusions for each balance-related audit
objective. Do not write an audit program.
c . Explain the relationship between the tests of controls and substantive tests of trans-
actions results in Case 18-32 and the audit of expenses.
d. How will the tests of controls and substantive tests of transactions results and
your conclusions (1 through 7) affect your planned tests of details of balances for
expenses? Do not write an audit program.
19-29 (Objective 19-2) You are doing the audit of the UTE Corporation for the year
ended December 31, 2013. The following schedule for the property, plant, and equipment
and related allowance for depreciation accounts has been prepared by the client. You
have compared the opening balances with your prior year’s audit documentation.
UTE Corporation Analysis of Property, Plant, and Equipment
and Related Allowance for Depreciation Accounts
Year Ended December 31, 2013
Final Per Books
Description 12/31/12 Additions Retirements 12/31/13

Assets
Land $ 225,000 $ 50,000 $ 275,000
Buildings 1,200,000 175,000 1,375,000
Machinery and equipment 3,850,000
_________ 404,000
________ 260,000
________ 3,994,000
_________
$ 5,275,000 $ 629,000 $ 260,000 $ 5,644,000

Allowance for Depreciation

Building $ 600,000 $ 51,500 $ 651,500
Machinery and equipment 1,732,500
_________ 392,200
________ 2,124,700
_________
$ 2,332,500 $ 443,700 $ 2,776,200

The following information is found during your audit:

1. All equipment is depreciated on the straight-line basis (no salvage value taken into
consideration) based on the following estimated lives: buildings, 25 years; all other
items, 10 years. The corporation’s policy is to take one-half year’s depreciation on
all asset acquisitions and disposals during the year.
2. On April 1, the corporation entered into a 10-year lease contract for a die-casting
machine with annual rentals of $50,000, payable in advance every April 1. The
lease is cancelable by either party (60 days’ written notice is required), and there
is no option to renew the lease or buy the equipment at the end of the lease.
The estimated useful life of the machine is 10 years with no salvage value. The
corporation recorded the die-casting machine in the machinery and equipment
account at $404,000, the present value at the date of the lease, and $20,200,
applicable to the machine, has been included in depreciation expense for the year.
3. The corporation completed the construction of a wing on the plant building on
June 30. The useful life of the building was not extended by this addition. The
lowest construction bid received was $175,000, the amount recorded in the

648 Part 4 / APPLICATION OF THE AUDIT PROCESS TO OTHER CYCLES