Methods of Auditing Construction Equipment Depreciation Essay

Methods of Auditing Construction Equipment Depreciation - Essay ExampleMethods of Calculating Depreciation The total amount of depreciation over the life of a fixed plus is computed by deducting the residual value from the total cost of the fixed asset. Some of the important techniques for calculating depreciation are given below. 1. satisfying line depreciation Majority firms use straight line depreciation method as it assists the accounting department to avoid clerical interlinkingity and practise financial reporting easy. As Bragg (2002) points pop out, straight line depreciation method is based on the assumption that each accounting rate of flow of the assets life has an equal amount of depreciation (p.189). The procedures for calculating depreciation under straight line method include determination of useful life of the asset in years, determination of salvage value of the asset, deduction of the estimated salvage value from the purchase price of the asset, and finally sub stitution of identified valued into the equation. 2. Reducing remainder method nether this method, a high one-year depreciation is charged in the early years of an assets life and the charged annual depreciation progressively diminishes as the asset ages. To record this pattern of depreciation, an annual depreciation is charged as a fixed percentage of the written cut down value of the asset. Substantive Audit Procedures An audit strategy for the most part deals with the assessment of internal controls and the performance of substantive tests. As Wilson and Colbert (1991) state, a substantive test generally involves analysis procedures and tests of details. Analytical procedures assist the auditor to draw conclusions on the basis of expected amounts calculated while the test of details involves the evaluation of details of the twisting equipment account for the purpose of reconstructing and formulating conclusion about the reported account balance. The goals of the auditor can b e attained at less cost and time with analytical procedures rather than test of details. Analytical procedures According to recent accounting standards, there are a number of analytical procedures ranging from simple comparisons to use of complex models. However, most commonly used procedures are trend analysis, reasonable tests, ratio analysis, and structural modeling. A. Trend analysis Under this method, the auditor can choose all a diagnostic or a casual approach. The diagnostic approach aids the auditor to evaluate whether the current balance of the construction equipment account is out of line with the trend identified with the assets previous account balances whereas the casual approach assists the auditor to calculate an expected balance for that account. B. Reasonable tests Under this analytical procedure, the auditor calculates an expected amount for the equipments account balance using nonfinancial data for the current period. In this method, only the operating data for the auditing period is taken into consideration. C. Ratio analysis In ratio analysis method, the auditor compares relationships among construction equipment balances. Generally, ratio analysis is applied on a times serial publication or a cross sectional basis. D. Structural modeling Using this type of analytical procedure, the auditor frames a statistical model from financial or nonfinancial data of previous accounting period to forecast current equipment account balances. Test of details As stated,