[barelystayingsane]

Property acquisitions that are misclassified as maintenance expense would most likely be detected by an internal accounting control system that provides for:

a. Investigation of variances within a formal budgeting system

b. Segregation of duties of employees in the accounts payable department

c. Examination by the internal auditor of vendor invoices and canceled checks for property acquisitions

d. Review and approval of the monthly depreciation entry by the plant supervisor.

The answer is a., and after reading the explanation, I understand why that’s the case. However, my initial reaction was to choose d., and I still don’t understand why d. would be incorrect. If the plant got some new property (and I’m assuming the plant supervisor would be aware of the acquisition), but the supervisor didn’t see depreciation expense increase accordingly, wouldn’t that raise some red flags?

[Anonymous]

This is one of those questions where you have to pick the best answer as the AICPA sees it. In the real world, I would chose B because A/P employees miscode invoices frequently.

However, in the ideal accounting world, capital expenditures should be budgeted long in advance. Scheduled maintenance/repairs are required and planned for the giant expensive machine on the production floor. If the budget shows that maintenance should have been performed in August, then variances should be investigated to find out what happened. Did it happen in July or September instead? That would create another variance that will offset the issue.

[mla1169]

auslaf is correct that they are looking for the “best” answer. d is correct but a is more reliable.

auslaf, your choice of B would be intended to PREVENT a misclassification, not to DETECT it once it already occurred. Once something has already occurred it is a rare circumstance that another AP employee would see the detail.

FAR- 77
AUD -49, 71, 84
REG -56,75!
BEC -75

Massachusetts CPA (non reporting) since 3/12.

[Author]

Replies