Construction Company Auditing Process Essay

Introduction

Over the past decades, auditing has been widely associated with accounting and maintenance of financial records. Gupta (2005, p.7) asserts that auditing is aimed at enabling auditors to develop an opinion regarding the effectiveness with which firms financial statements and records have been prepared. That is, the financial records have to be in line with a particular financial reporting framework.

Therefore, auditing can be regarded as a process aimed at verifying the accounting data (Gay& Simnett, 2009, p.46). This means that it entails a comprehensive evaluation of the accounting data and the evidence available in a firm’s accounting books.

For an auditor to complete his or her job successfully, he or she should consider using external evidence for example by confirming bank balances from financial institutions and conducting physical counts of the evidence. The auditor must follow a particular procedure in his or her auditing process.

For example, in Australia, the auditor must follow the Auditing Standards (Australian Accounting Research Foundation, 2002, p. 1). In its operation, a certain construction company has a substantial amount of mobile construction equipments.

Additionally, the firm maintains a subsidiary ledger of the construction equipments. This paper is aimed at identifying and describing the substantive procedures that the auditor would conduct in examining mobile equipments and the related depreciation of a construction company.

Auditing procedure

The following procedure will be used in examining the mobile equipments.

1. The auditor will make a decision on the most efficient work-paper approach to use in auditing the mobile equipments. According to Vallabhaneni (2005, p.325), consideration of work paper approach aids in the identification of any fraudulent activities. In order to be effective, the auditor will use the company’s record of mobile equipments. Prior to this, the auditor will require the company’s paraprofessional to update the property accounts accordingly. Additionally, the auditor will also evaluate the lead schedule which will show all the transactions that have been conducted with respect to each particular account. This will aid in identifying all the changes with regard to the property.
2. To ensure effective preparation of the federal income tax return for the company, the auditor will obtain different information regarding the mobile construction equipments. The date they were acquired, their respective cost, their useful life and the method of depreciation used in order to effectively determine the tax return. In the event that some equipment were retired, the auditor will identify the date that they were retired, the depreciation method used through to their retirement, the proceeds received from the sale of the retired equipments and the date the equipment was acquired.
3. The auditor will also take into considerations all the additions of the mobile equipments. This will be achieved by requesting the company’s manager to give a summary of all mobile equipments that the firm has acquired during the year. This will include all the purchased and the leased equipments. This will aid in eliminating any possible omissions of the firm’s mobile property from the work-papers. The auditor will compare this information with the additions that were identified during the physical observation of the mobile equipments.
4. The auditor will also obtain an analysis of all transactions that the firm might have conducted on its mobile equipments. One of accounts that the auditor will take into consideration relate to repair and maintenance account. If there are such transactions, the auditor will further examine all significant invoices with regard to the repairs and maintenances conducted.
5. A document of the items tested will be prepared.
6. The auditor will also examine whether there are any significant expenses that could be capitalized as additions to the equipments during the current year.
7. The auditor will also enquire from the company’s manager whether there have been any major sales of equipments, abandonments and retirements in the firm’s equipments that have not been recorded in the firm’s books of account.
8. The auditor will also evaluate the firms’ revenue accounts to determine if there are any significant amounts of proceeds from such sales. The auditor will also determine whether all the costs and depreciation related to the equipments have been reflected in the firm’s retirement work-papers.
9. The auditor will also test the adequacy of the depreciation amount with regard to the mobile equipments. To achieve this, the auditor will inquire from the firm’s manager whether there have been any changes that have been made to the depreciation methods used.
10. Additionally, the auditor will also conduct an analytical procedure in order to determine whether the current year depreciation to the mobile equipments is reasonable. The auditor may also recompute the depreciation expense on all the firm’s mobile equipments. The auditor may also conduct a cross reference of the firms’ current depreciation with the depreciation that has been recorded in the expense account.
11. The auditor should evaluate whether the value of the equipments have been appropriately determined.

Conclusion

Through this procedure, the auditor will be able to effectively audit the firm’s mobile equipments and the related depreciation. The results of the audit should be documented with the company’s work-paper.

Reference List

Australian Accounting Research Foundation.2002. Engagements to perform agreed upon procedures. Web. Available at: https://www.auasb.gov.au/admin/file/content102/c3/AUS904_07-02.pdf

Gay, G. & Simnett, R., 2009. Auditing and assurance services in Australia. New York: McGrawHill.

Gupta, K., 2005. Contemporary auditing. New Delhi: Tata McGraw-Hill. Vallabhaneni, S., 2005. Wiley CIA exam review. Hoboken, N.J: Wiley.