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Audits of financial statements are designed to determine whether account balances are materially

correct. Assume that your client is a manufacturing company that has the following assets on its

balance sheet

·         Machinery: $1,278,000

·         Accumulated depreciation: $386,000

·         Leased equipment: $550,000

a. Describe a substantive audit procedure that can be used to determine that all leased

equipment that should have been capitalized during the year was actually capitalized.

Please refer to the knowledge from intermediate accounting and the requirements of an

audit working paper to design a template audit working paper that can be used to examine

whether a leased equipment should have been capitalized or treated as lease expense

b. The machinery account shows that the company retire approximately $400,000 of old

machinery this year. Identify a substantive audit procedure that will determine the

machinery account was properly accounted for during the year

c. Assuming the auditor determines that the machinery were properly retired, what other

information does the auditor need to know to have reasonable assurance that the

machinery-net of depreciation-is properly reflected on the balance sheet?

d. How can an auditor determine that all the machinery and leased equipment on the account

 

actually exist?

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