Question 2. Small Town Steel—sampling methods and projecting
errors (4%) Small Town Steel is based in Molong, NSW, and produces
a range of high-quality steel fabrication products including tubes,
pipes, plates, fasteners, and fittings for the industrial,
commercial, and residential sectors. Sales to the commercial sector
have been steady but thanks to a mining and building boom, sales to
the industrial and residential sectors have doubled in the past
year. Property, plant, and equipment (PPE) is one of Small Town
Steel’s most material balances. During her planning for the audit
of PPE your Graduate, Kristin Jensen, notes a major investment in a
new manufacturing process. This is supported by her preliminary
analytical procedures which indicate an increase in acquisitions of
PPE. As per her interim audit procedures, Kristin tested the
appropriateness of the depreciation rates assigned to PPE, and
whether it is consistent with the present condition and expected
use of the assets over the remaining life. Kristin sampled 28 PPE
items, with a total dollar value of $1,325,000. The results show
that for the sample items some depreciation rates were too low
and/or the remaining useful life of the equipment was overstated by
management. Together these issues produce an error in the sample of
$63,500. Small Town Steel has a profit before tax for the current
year of $1,673,000 and a PPE balance at the end of the year of
$10,325,000.
Required
Discuss with Kristin the:
Question 2. Small Town Steel—sampling methods and projecting errors (4%) Small Town Steel is based in Molong, NSW, and p
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