An auditor is performing an audit of a nonissuer. The auditor identifies a risk that the entity may be capitalizing repairs and maintenance expenses to inflate assets. Which of the following procedures is MOST appropriate to address this risk?

Answer options:

Vouching a sample of repairs and maintenance expense entries to invoices.

Vouching a sample of additions to property, plant, and equipment to vendor invoices.

Tracing a sample of vendor invoices for repairs to the repairs and maintenance expense account.

Recalculating depreciation expense.

How to approach this question

Risk: Capitalizing Expenses. Where is the error? In the Asset account (PPE Additions). Go look there.

Full Answer

B.Vouching a sample of additions to property, plant, and equipment to vendor invoices.✓ Correct

To detect the capitalization of repairs (expenses), the auditor should examine the 'Additions' to Property, Plant, and Equipment. By vouching these additions to invoices, the auditor can determine if the items are truly capital assets or if they are repairs that should have been expensed.

Common mistakes

Looking in the expense account (Option A). The problem is the expense ISN'T there.

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