Exam 13: Auditing Resource Management Processes

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a. Operational risk: Ineffective or inefficient property management may result in problems of excess capacity, impaired asset values, poor maintenance, inefficient space utilization, cost overruns or delays, and safety hazards.
b. Information risk: Information systems problems will have a direct effect on the risk of inaccurate information processing, inaccurate cost measurement, and inaccurate amortization.

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Because the cranes are self-constructed assets, the auditor will need to examine evidence of the materials (inventory), labor (payroll), and administrative oversight used in production of the cranes, as well as the possibility that interest should be capitalized as part of the cost of the asset.

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a. Substantive analytical procedures can be very useful for testing depreciation. Since most companies use a single depreciation method and classify assets into categories with a single useful life (e.g., 5, 10, or 25 years), the auditor can usually generate a relatively precise estimate for depreciation expense. If the client's records indicate depreciation that is close to that amount, the auditor would probably conclude that depreciation was properly recorded unless other evidence of a problem became available. However, if the client's records show an amount that is significantly different, the auditor would investigate the discrepancy. In such cases, the auditor would probably start by refining the estimate.
b. Substantive analytical procedures could be useful for other accounts such as insurance expense, property taxes, and utilities. Repairs and maintenance expense relative to gross plant assets is also a useful measure and provides an indication of proper classification of asset-related expenditures. The strength of analytical evidence will depend on the precision of the estimate, the reliability of the information used as input to the estimation, and the size of the discrepancy between the estimate and the actual recorded value. Again, if the unexplained discrepancy is large, the auditor will need to follow up until satisfied that there is no material misstatement in the account in question.
c. The WorldCom audit failure involved the auditor's inability to detect the inappropriate classification of hundreds of millions of capitalized operating expenses. Substantive analytical review of both the asset and expense accounts at a very detailed level should have revealed amounts of this size.