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Auditing: A Risk Based Approach to Conducting a Quality Audit, 10e

Solutions for Chapter 12

True/False Questions

12-1 F
12-2 T
12-3 T
12-4 T
12-5 T
12-6 T
12-7 T
12-8 F
12-9 T
12-10 F
12-11 T
12-12 F
12-13 F
12-14 T
12-15 T
12-16 T

Multiple-Choice Questions

12-17 D
12-18 A
12-19 D
12-20 A
12-21 B
12-22 D
12-23 B
12-24 C
12-25 A
12-26 D
12-27 C
12-28 A
12-29 B
12-30 C
12-31 C
12-32 B

© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

12-1
Review and Short Case Questions

12-33

The existence and valuation assertions related to long-lived assets are usually the more relevant
assertions. Organizations may have incentives to overstate their long-lived assets and may do so
by including fictitious long-lived assets on the financial statements. Alternatively, organizations
may capitalize costs, such as repairs and maintenance costs, which should be expensed. Concerns
regarding valuation include whether the organization properly and completely recorded
depreciation and properly recorded any asset impairments. The valuation issues typically involve
management estimates that may be subject to management bias.

Identifying and focusing on the relevant assertions will allow the auditor to be more efficient in
the performance of the audit (i.e., the auditor will not over-audit the lower risk assertions and
will focus more effort on the higher risk assertions).

12-34

Depreciation expense relates to the expensing of a fixed asset over its life. For natural resources,
the related expense account would be referred to as depletion expense (the expense associated
with the extraction of natural resources). For intangible assets with a definite life, the related
expense account would be referred to as amortization expense.

12-35

The five management assertions relevant to long-lived assets are as follows:

1. Existence or occurrence. The long-lived assets exist at the balance sheet date. The focus
is typically on additions during the year.
2. Completeness. Long-lived asset account balances include all relevant transactions that
have taken place during the period.
3. Rights and obligations. The organization has ownership rights for the long-lived assets as
of the balance sheet date.
4. Valuation or allocation. The recorded balances reflect the balance that is in accordance
with GAAP (includes appropriate cost allocations and impairments).
5. Presentation and disclosure. The long-lived asset balance is reflected on the balance sheet
in the noncurrent section. The disclosures for depreciation methods and capital lease
terms are adequate.

12-36

Asset impairment is a term used to describe management’s recognition that a fixed asset is no
longer as productive as had originally been expected. When assets are impaired, the assets should
be written down to their expected economic value.

© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

12-2
Much of the inherent risk associated with long-lived assets is due to the importance of
management estimates, such as estimating useful lives and residual values and determining
whether asset impairment has occurred. Inherent risk related to asset impairment stems from the
following factors:

• Normally, management does not have incentives to identify and write down assets.
• Sometimes, management wants to write down every potentially impaired asset to a
minimum realizable value (although this will cause a one-time reduction to current
earnings, it will lead to higher reported earnings in the future).
• Determining asset impairment, especially for intangible assets, requires a good
information system, a systematic process, good controls, and professional judgment.

12-37

Natural resources present unique risks. First, it is often difficult to identify the costs associated
with discovery of the natural resource. Second, once the natural resource has been discovered, it
is often difficult to estimate the amount of commercially available resources to be used in
determining a depletion rate. Third, the client may be responsible for restoring the property to its
original condition (reclamation) after the resources are removed. Reclamation costs may be
difficult to estimate.

12-38

Intangible assets should be recorded at cost. However, the determination of cost for intangible
assets is not as straightforward as it is for tangible assets, such as equipment. As with tangible
long-lived assets, management needs to determine if the book values of patents and other
intangible assets have been impaired. Thus, there is a great deal of estimation by management
associated with intangible assets.

12-39

a. Management’s motivation to overstate fixed assets is similar to other circumstances in

which fraud is perpetrated:

• Increase reported earnings

• Boost stock price
• Improve ability of the company to acquire another company
• Avoid a violation of company debt covenants

b. The auditor should also consider the other two components of the fraud triangle–
opportunity and rationalization–when assessing fraud risk associated with long-lived assets.

© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

12-3
12-40

A skeptical auditor will understand that management can manage earnings in a number of ways,
including:

• Improperly recording repairs and maintenance costs that should be expensed as fixed
assets.
• Lengthening the estimated useful lives and/or increasing estimated residual value of
depreciable assets without economic justification as was done in the Waste Management
fraud.

The auditor becomes aware of management’s potential by considering relevant fraud risk factors,
including incorporating information related to internal control effectiveness–in particular the
control environment.

12-41

Potential fraud schemes related to long-lived assets include:

• Sales of assets are not recorded and proceeds are misappropriated.

• Assets that have been sold are not removed from the books.
• Inappropriate residual values or lives are assigned to the assets, resulting in
miscalculation of depreciation.
• Amortization of intangible assets is miscalculated.
• Costs that should have been expensed are improperly capitalized.
• Impairment losses on long-lived assets are not recognized.
• Fair value estimates are unreasonable or unsupportable.

12-42

Typically, the more relevant assertions (areas of higher risk) for tangible long-lived assets (e.g.,
property, plant, and equipment) include existence and valuation. For these assertions, the
appropriate internal controls could include:

• The use of a computerized property ledger. The property ledger should uniquely identify
each asset. In addition the property ledger should provide detail on the cost of the
property, the acquisition date, depreciation method used for both book and tax, estimated
life, estimated scrap value (if any), and accumulated depreciation to date.
• Authorization procedures to acquire new assets. In particular, the use of a capital
budgeting committee to analyze the potential return on investment is a strong control
procedure.
• Periodic physical inventory of the assets and reconciliation with the recorded assets.
• Formal procedures to account for the disposal of assets.
• Periodic review of asset lives and adjustments of depreciation methods to reflect the
changes in estimated useful lives.
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

12-4
12-43

For intangible assets, the client should have controls designed to:
• Provide reasonable assurance that decisions are appropriately made to capitalize
(completeness of assets) or expense (existence of assets) research and development
expenditures
• Develop amortization schedules that reflect the remaining useful life of intangible assets
such as patents or copyrights (valuation)
• Identify and account for intangible-asset impairments (valuation)

Management should have a monitoring process in place to review valuation of intangible assets.
For example, a pharmaceutical company should have fairly sophisticated models to predict the
success of newly developed drugs and monitor actual performance against expected performance
to determine whether a drug is likely to achieve expected revenue and profit goals. Similarly, a
software company should have controls in place to determine whether capitalized software
development costs will be realized. Exhibit 12.2 identifies examples of other controls over
intangible long-lived assets that clients may design and implement.

12-44

Analytical procedures that would be included as part of planning analytical procedures related to
depreciation expense include analysis of the following relationships, in the light the expectations
developed by the auditor:

• Current depreciation expense as a percentage of the previous year's depreciation expense,

• Fixed assets (by class) as a percentage of previous year's assets. The relative increase in
this percentage can be compared with the relative increase in depreciation expense as a
test of overall reasonableness.
• Depreciation expense (by asset class) as a percentage of assets each year. This ratio can
indicate changes in the age of equipment or changes in depreciation policy, or
computation errors.
• Accumulated depreciation (by class) as a percentage of gross assets each year. This ratio
provides information on the overall reasonableness of the account and may indicate
problems of accounting for fully depreciated equipment.
• Average age of equipment (by class). This ratio provides additional insight on the age of
assets and may be useful in modifying depreciation estimates.

12-45

Ratios and expected relationships that auditors can use when performing planning analytical
procedures include:

• Review and analyze gains/losses on disposals of equipment (gains indicate

depreciation lives are too short, losses indicate the opposite).
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

12-5
 • Perform an overall estimate of depreciation expense.
• Compare capital expenditures with the client’s capital budget, with an expectation that
capital expenditures would be in line with the capital budget.
• Compare depreciable lives used by the client for various asset categories with that of
the industry, with a typical expectation that the client’s depreciable lives would be
consistent with those in the industry. Large differences may indicate earnings
management.
• Compare the asset and related expense account balances in the current period to similar
items in the prior audit and determine whether the amounts appear reasonable in relation
to other information you know about the client, such as changes in operations

Ratios that the auditor should plan to review, after developing independent expectations, include:

• Ratio of depreciation expense to total depreciable long-lived tangible assets. This ratio
should be predictable and comparable over time unless there is a change in depreciation
method or asset lives. The auditor should plan to analyze any unexpected deviations and
assess whether any changes are reasonable.
• Ratio of repairs and maintenance expense to total depreciable long-lived tangible assets.
This ratio may fluctuate because of changes in management’s policies (for example,
maintenance expenses can be postponed without immediate breakdowns or loss of
productivity). The auditor should plan to analyze any unexpected deviation with this
consideration in mind.
• Long-lived assets to total assets

12-46

Panel B of Exhibit 12.3 illustrates the different levels of assurance that the auditor could obtain
from tests of controls and substantive procedures. The reason for the differing approaches is due
to the different levels of risk of material misstatement associated with each of the clients. Panel
B makes the point that because of the higher risk associated with the existence of equipment at
Client B, the auditor will want to design the audit so that more of the assurance is coming from
tests of details. In contrast, the risk associated with the existence of equipment at Client A is
lower and therefore the auditor would be willing to obtain more assurance from tests of controls
and substantive analytics, and less assurance from substantive tests of details. Note that the
relative percentages are judgmental in nature; the examples are simply intended to give you a
sense of how an auditor might select an appropriate mix of procedures.

12-47

For many organizations, long-lived assets involve only a few assets of relatively high value. In
these settings, the time and effort needed to perform tests of controls in order to reduce
substantive testing may exceed the time required to simply perform the substantive tests. Thus,
the most efficient approach would be to use a substantive approach, using test of details, for
testing.

© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

12-6
12-48

Control Procedure Purpose of Control Impact on Substantive Audit

Procedure (a) Procedures (b)
1. Periodic physical Provide reasonable Auditor should expand
inventory of assets. assurance that records procedures either by taking a
reflect equipment on-hand sample from the property ledger
and in use. Relates to and verifying existence or take a
existence and tour of plant and identify idle
completeness. equipment for future review (or
both procedures.)
2. Policy to classify Provide reasonable Auditor would have to review
equipment and compute assurance of consistent use each equipment life for
depreciation. of depreciation methods consistency and rationale for the
based on experience of life chosen.
client. Relates to valuation.
3. Policy on minimum Promote processing There is no particular effect on
amounts that are to be efficiency by expensing the audit except that the
capitalized. small dollar value items. property, plant and equipment
ledger would have substantially
larger items as the smaller dollar
items would have been
expensed.
4. Method for designating Provide reasonable Auditor would expand
scrap or idle equipment for assurance that the records production facilities tour with
disposal. are updated for changes in special emphasis on identifying
productive life of assets. obsolete or non-productive
Relates to valuation. assets. The items identified
would be discussed with
management in order to
determine if adjustments are
needed.
5. Differentiate major Provide reasonable Expand review of repairs and
renovations from repair assurance that the proper maintenance expense.
and maintenance. accounting since major Investigate all large expenditures
renovations may extend to determine if they are more
the life of the asset and appropriately classified as
should be debited to renovations.
accumulated depreciation.

6. Self-construction of Provide reasonable Perform a detailed review of all

assets. assurance of proper self-constructed assets.

© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

12-7
Control Procedure Purpose of Control Impact on Substantive Audit
Procedure (a) Procedures (b)
accounting for self-
constructed assets.
7. Systematic review for Provide reasonable Auditor would have to review
asset impairment. assurance of proper asset productivity each year and
accounting for asset make inquiries of client of the
impairment (valuation accounting for impaired assets.
issues). Company Auditor would be more alert to
performing the review on a declining productivity indicators
consistent basis is a strong or changes in product mix that
control because it might affect asset values.
eliminates many of the
"big bath" write-offs.
8. Management Provide reasonable Auditor should review asset
periodically reviews assurance of asset disposals for potential impact on
disposals for potential valuation. choice of economic lives for
impact on changing asset assets.
lives for depreciation
purposes.

12-49

Test of controls over tangible long-lived assets could include:

• Examine documentation corroborating that a tangible long-lived asset budget is prepared

and used.
• Examine relevant documentation for management's approval process of the tangible long-
lived asset budget.
• Examine a sample of tangible long-lived asset requisition forms for management's
approval.
• Inspect copies of the vouchers used to document departmental request for sale,
retirement, or scrapping of tangible long-lived assets for management's approval.
• Test depreciation shown in the general ledger to the amounts shown in the tangible long-
lived asset ledger. (This might be performed as a dual purpose test.)
• Review or recompute a sample of depreciation calculations.
• Agree the posting of depreciation expense to the general ledger.
• Inspect the tangible long-lived asset ledger for adequate detail to support the tangible
long-lived asset accounts.
• Verify that the tangible long-lived asset ledger is periodically balanced to the general
ledger.
• Verify accuracy of calculations on a sample of tangible long-lived asset requisition
forms.
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

12-8
 • Check for the existence of a written policy which establishes whether a budget request is
to be considered a capital expenditure or a routine maintenance expenditure.
• Confirm the existence of approved vouchers for entries which remove assets from the
tangible long-lived asset ledger.
• Inspect documentation of tangible long-lived asset requisition forms for authenticity.
• Test a sample of maintenance expenditures to evaluate compliance with the written
policy which establishes whether an item is to be considered a capital expenditure or a
routine maintenance expenditure.
• Evaluate the effectiveness and appropriateness of the written policy used to distinguish
capital expenditures from maintenance expenditures.
• Compare costs and prices on a sample of tangible long-lived asset requisition forms to
established list prices to determine reasonableness.
• Compare sale or scrap prices on a sample of vouchers used to document departmental
requests for sale, retirement, or scrapping of tangible long-lived assets to established list
prices to determine reasonableness.
• Review tangible long-lived asset budget reports and note management's explanation of
any significant variances.
• Scan the tangible long-lived asset ledger for unusually large or small items.
• Through review of relevant documentation and inquiry of appropriate personnel
determine that tangible long-lived asset records are maintained by persons other than
those who are responsible for custody and use of the assets.
• Agree the identification numbers of a sample of fixed assets to those shown in the
tangible long-lived asset ledger.
• Through review of relevant documentation and inquiry of appropriate personnel, verify
that periodic physical inventories of tangible long-lived assets are taken for purposes of
reconciliation to the tangible long-lived asset ledger as well as appraisal for insurance
purposes.
• Through review of relevant documentation and inquiry of appropriate personnel,
substantiate that periodic physical inventories of tangible long-lived assets are taken
under the supervision of employees who are not responsible for the custody of record
keeping for the tangible long-lived assets.
• Through review of relevant documentation and inquiry of appropriate personnel,
investigate whether significant discrepancies between the tangible long-lived asset ledger
and physical inventories are reported to management.

12-50

CONTROL POSSIBLE TESTS OF CONTROLS

Management authorizations are required for For selected intangible asset transactions
intangible asset transactions. inquire of management as to the authorization
process and review documentation of the
appropriate authorizations.
Documentation regarding intangible assets For selected intangible assets, review
should be maintained and such documentation documentation and assess reasonableness of
should include: management estimates
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12-9
 o Manner of acquisition (e.g.,
purchased, developed internally),
o Basis for the capitalized amount,
o Expected period of benefit, and
amortization method.
Amortization periods and calculations should For selected items, inquire of management
be approved and periodically reviewed by regarding this process, review documentation
appropriate personnel. supporting the process, and recompute
calculations.

12-51

• To detect fictitious assets, the auditor should have traced recent recorded acquisitions of
long-lived asset accounts to original source documents; doing so would have enabled the
auditor to realize that such documents did not exist.
• For improper depreciation, the auditor should have compared depreciation expense over a
period of time, adjusting for the volume of business and the number of trucks used. The
decrease in depreciation per truck should have led to more detailed investigation,
including tests of depreciation on each truck.
• For the impairment issue, the auditor should have compared current earnings with future
expected earnings that were predicted when the goodwill was initially recorded. A
dramatic decrease in current earnings signals the need for an impairment adjustment. As
discussed in a later chapter, there is a formalized approach to be used in determining
goodwill impairment
• For the impaired assets, the auditor should have noted (a) the relative age of the assets
(net book value has decreased), (b) idle equipment during a tour of the factory, and (c)
should have traced apparently idle assets to the books.
• For the assets overvalued at acquisition, the auditor should have determined if the
company had used a reputable and certified independent appraiser. If the auditor had
doubts, he or she should have hired an appraiser (auditor expert/specialist) to form an
independent opinion.

12-52

Compute the average balance: ($380,500 + $438,900) / 2 = $409,700

Adjust for the salvage value: $409,700 * .9 = $368,730
Compute the annual depreciation expense: $368,730 / 6 = $61,455.

Once the auditor has developed an expectation of the account balance, the auditor will compare
that expectation with the amount recorded by the client. If the difference between the two
amounts is less than the threshold (based on level of materiality) set by the auditor, the auditor
would conclude that the recorded depreciation expense is reasonable. Although the problem did
not provide details on the auditor’s threshold, it is reasonable to believe that the difference
between the auditor’s expectation and the client’s recorded amount in this problem would be
below that auditor’s threshold. Thus, the auditor would likely conclude that the recorded
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12-10
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depreciation expense of $60,500 appears reasonable, given the auditor’s expectation of $61,455.
Given the results of this substantive analytical procedure, the auditor will likely not need to
perform any additional substantive tests of details.

12-53

The audit approaches applicable to identifying and determining the proper accounting of fully
depreciated or idle facilities would include:

• The auditor should tour the client facilities and make inquiries concerning idle
equipment. The auditor should note all idle equipment to be subsequently traced to the
property ledger. Discussions with management about these issues will also be helpful.
• GAS could be used to develop a schedule of fully depreciated assets. A sample could be
taken and the auditor could attempt to physically observe the asset and determine whether
it is in production and whether a scrap value is appropriate.

12-54

The client has a policy that apparently has been used for a number of years. Assignment of assets
to classes for depreciation purposes is common and represents an expedient method of dealing
with depreciation issues. The auditor can determine the reasonableness of the classification
schemes by:

• Reviewing previous data on the asset's productive life (within each category)
• Reviewing IRS guidelines for classification and reasonableness in comparison with the
company's categories and life guidelines
• Noting significant gains/losses on disposal (suggesting potentially inappropriate asset
lives).

12-55

The general concept of valuing impaired assets consists of two major approaches:

• Estimating the future economic benefits to be derived from the asset. The auditor would
evaluate management’s assumptions and estimates for reasonableness.
• Obtaining an independent appraisal of current value. The auditor could either assess the
competence and independence of the appraiser hired by management and the
reasonableness of the assumptions used and/or the auditor could obtain an independent
appraisal of the value of the asset.

12-56

The auditor must make sure the appraisal is reasonable. The auditor should consider the
qualifications and certification of the appraiser and appropriateness of the assumptions used by

© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

12-11
the appraiser. The auditor may also need to use an auditor specialist/expert to assist with these
audit procedures.

12-57

General substantive procedures for leases include:

• Obtain copies of lease agreements, read the agreements, and develop a schedule of lease
expenditures.
• Review the lease expense account, select entries to the account, and determine if there are
entries that are not covered by the leases obtained from the client. Review to determine if
the expenses are properly accounted for.
• Review the relevant criteria from FASB ASC to determine which leases meet the
requirement of capital leases.
• For all capital leases, determine that the assets and lease obligations are recorded at their
present value. Determine the economic life of the asset. Calculate amortization expense
and interest expenses, and determine any adjustments to correct the financial statements.
• Develop a schedule of all future lease obligations or test the client’s schedule by
reference to underlying lease agreements to determine that the schedule is correct.
• Review the client’s disclosure of lease obligations to determine that it is in accordance
with GAAP.

12-58

Items 1 through 6 could have been found in the following way:

1. The company's policies for depreciating equipment are available from several sources:
• The prior-year's audit working papers and permanent file.
• Footnote disclosure in the annual report and SEC Form 10-K.
• Company procedures manual.
• Detailed fixed asset records.
• Inquiry of relevant client personnel.

2. The ten-year lease contract would be found when supporting data for current year's
equipment additions were examined. Also, it may be found by a review of company lease and
contract files.

3. The building wing addition would be apparent by the addition to buildings during the
year. The use of the low construction bid amount would be found when support for the addition
was examined. When it was determined that this inappropriate method was followed, the actual
costs were determined by reference to construction work orders and supporting data. The wing
was also physically observed by the auditor.

4. The paving and fencing was discovered when support was examined for the addition to
land. These costs should be charged to Land Improvements and depreciated.
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

12-12
5. The details of the retirement transactions were determined by examining the sales
agreement, cash receipts documentation, and related detailed fixed asset record. This
examination would be instigated by the recording of the retirement in the machinery account or
the review of cash receipts records.

6. The auditor would become aware of a new plant in several ways:

• Volume would increase.

• Account details such as cash, inventory, prepaid expenses, and payroll would be
attributed to the new location.
• The transaction may be indicated in documents such as the minutes of the board, press
releases, and reports to the stockholders.
• Property tax and insurance bills examined show the new plant.
• Inquiry of appropriate client personnel.

One or more of these factors would lead the auditor to investigate the reasons and
circumstances involved. Documents from the city and appraisals would be examined to
determine the details involved.

12-59

a. Impairment of assets refers to long-lived tangible assets and certain identifiable

intangibles to be held and used by an entity for which events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. In performing the review
for recoverability, the entity should estimate the future cash flows expected to result from the use
of the asset and its eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of the asset, an
impairment loss is recognized. Otherwise, an impairment loss is not recognized. Measurement of
an impairment loss for long-lived assets and identifiable intangibles that an entity expects to hold
and use should be based on the fair value of the asset.

b. Management’s motivation will depend on the specific facts and circumstances. In some
settings, management may follow the so-called big bath theory and take very large write-offs
when any write-off occurs. The rationale for this approach is that the market seems to be
forgiving, especially if there is a change in management and the new management can blame the
problems on the previous management. If the write-off is large, then it decreases the amount of
assets that might be charged against earnings in the future. In some settings, the investment
public is skeptical of the large write-offs and has recognized such write-offs as a symbol of
management failure. Thus, managers will resist taking any write-offs unless there is compelling
evidence that there has been impairment in assets.

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12-13
However, it is important to recognize that management will want to understate expenses, and
thus overstate income, and so will want to understate the write-off. The auditor has to be aware
of management’s incentives when assessing the nature and type of potential misstatements.

c.

Step 1. Identify the ethical issue. The ethical issue is that the auditor believes that her estimate is
correct, and knows that it is materially lower than management’s estimate of the impairment.
Allowing the client to record its estimate may keep the client happy, but will result in financial
statements that are misleading.

Step 2. Determine who are the affected parties and identify their rights. There are various
affected parties:
• shareholders, who have a right to accurate financial information
• the audit committee and board, who have a right to know that the auditor and management
are having a material disagreement
• management, who has a right to uphold their own valid, defensible professional opinions
• the auditor and audit firm, who have a right to exercise their own professional judgment and
to minimize potential litigation against themselves
• tax authorities, who have a right to expect that management will make tax deductions that are
reasonable and appropriate

Step 3. Determine the most important rights. The most important rights are likely those of
shareholders, followed by the audit committee and board as major players in the corporate
governance of the company. The tax authorities represent society in general, so their rights are
also quite important.

Step 4. Develop alternative courses of action. The auditor could pursue various courses of action:

a. Try again to convince management that the auditor’s estimates are

superior.
b. Alert the audit committee of the disagreement and let them help to resolve
it.
c. Threaten management with a qualified audit opinion if they refuse to
acquiesce to the auditor’s preference.
d. Resign from the engagement.

Step 5. Determine the likely consequences of each proposed course of action.

a. Trying to convince management may or may not work. If it does work, then
the situation is resolved. If it does not work, the relationship between the
auditor and management will likely become even more strained.
b. Alerting the audit committee is required by professional standards. While it
may annoy management, the auditor can fall back on the requirement to
discuss such issues with the audit committee.
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

12-14
 c. Threatening management will obviously strain the relationship with the
auditor, but it may be successful in getting management to see the auditor’s
point of view.
d. Resigning is the last resort as it is a fairly extreme measure, and will result in
public disclosure of the disagreement for the company, and loss of revenue for
the audit firm.

Step 6. Assess the possible consequences, including an estimation of the greatest good for the
greatest number. The auditor is required via professional standards to alert the audit committee,
and doing so will likely enable the auditor to (a) re-think their estimate if the audit committee
convincingly challenges their calculations, or (b) use the interaction to convince management to
use the correct valuation in the impairment. Ultimately, the process of interacting with the audit
committee and management will enable all parties to determine the most appropriate impairment
calculation. The revelation of that amount to shareholders and tax authorities will result in the
greatest good for the greatest number.

Step 7. Decide on the appropriate course of action. The auditor should first try to convince
management to change the estimate, and even if they succeed in doing so the auditor must alert
the audit committee to the situation.

12-60

a. The main difficulty that the auditor faces in determining whether the charges are
reasonable is to understand management’s estimation procedures and to decide if they are
reasonable. The auditor will have to understand the following types of decisions:
• Which third party offers were used in the calculations? How did management choose
which offers to use if there were multiple offers?
• What is the appropriate discount rate for the discounted future cash flow calculations?
• Is it appropriate to completely write off the Falkirk, Scotland assets? Or is management
possibly setting up a cookie jar reserve by doing so?

b. The consequences of the auditor’s decisions are associated with providing reasonable
assurance that no fixed assets are inappropriately over-valued on the balance sheet (with
resulting under-expensing of impairment charges on the income statement) or under-valued on
the balance sheet (with resulting over-expensing of impairment charges on the income
statement).

c. The risks are those associated with inaccurate financial reporting, particularly if the
impairment charges are material to the client’s financial statements. The uncertainties involve the
estimates, for example, is a 7% discount rate correct, or should it be 5%?

d. The auditor can gather various types of evidence including:

• Documentation of management’s estimation process and assumptions
• Documentation that includes third-party offers and negotiations
• Confirmations with third parties
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

12-15
Other documents randomly have
different content
 46. RHEIMS CATHEDRAL. FLYING BUTTRESSES OF THE
CHOIR

The Rémois architects, while exercised by the problems of

equilibrium which their system involved, sought to minimise its
dangers, which they recognised no less fully than their predecessors,
by prudently avoiding all false bearings. It will be easily seen by a
comparison of the two sections (Figs. 45 and 48) that the builders of
Amiens were troubled by no such misgivings, or that they were at
least more venturesome if not more accomplished. They did not
hesitate to base the columns which received the crowns of the flying
buttresses on a corbel arrangement which had no solid bearing, as
may be seen by following the direction of the dotted line X in Fig.
48. The boldness, or rather the imprudence of such
an arrangement is patent, for the failure of anyone of the courses, or
the decay of any part of the pier into which the corbels are keyed,
would necessarily involve a rupture in the flying buttresses, on which
the stability of the main vault depends. The disintegration of the
whole building and its total ruin could be the only result. The perils
of such combinations, or rather such tours de force of equilibrium,
are exemplified at Beauvais. The architects who built the choir, about
the year 1225, basing it on that of Amiens, determined to raise a
monument which should surpass, both in plan and elevation, all the
structures of their epoch. They increased the breadth of the choir
and of its bays, raising, in the latter, intermediate piers on the
crowns of the lower archivolts, thus dividing the upper bays, and at
the same time strengthening the vault by auxiliary transverse
arches. They exaggerated the height of the archivolts and of the
large windows, and diminished their thickness, in order to give
greater elegance and lightness, and the main vault rose to a height
of more than 160 feet above the ground level. This tremendous
elevation, the exaggeration of which in proportion to the width of
the nave is striking, necessitated a complicated system of flying
buttresses surpassing in boldness all that had gone before. The
section in Fig. 51 will give some idea of what has been justly
described as an architectural folly. It is astonishing that the structure
should have stood as it has done, taking into account the false
bearings of the intermediate piers, here again shown by the dotted
line X (Fig. 51).
These rest for half of their thickness on off-sets from the piers,
which, proving unequal to the strain, have been temporarily stayed,
and must eventually be consolidated.
47. AMIENS CATHEDRAL. PLAN
 48. AMIENS CATHEDRAL. SECTION THROUGH THE NAVE

The choir, however, was finished about 1270, and stood for several
years. But dislocations then declared themselves. The forces so
elaborately balanced lost their equilibrium, and on the 29th
November 1284 the vault fell, dragging down with it the flying
buttresses, and carrying havoc through the rest of the building. In
the reconstruction which followed it was thought imperative to
double the points of support in the arcades both of the main and
side aisles, and to reinforce the flying buttresses by iron chains.
 During the thirteenth century a number of cathedrals were raised
all over Europe on the model of the great buildings of Northern
France, and more especially of Amiens, which seems to have roused
a great enthusiasm; these were, however, of far more modest
dimensions. They had neither the exaggerated height nor the
structural audacities of their exemplars. Few of these churches and
cathedrals, the reconstruction of which on the new system generally
began with the choir, which was
added to the primitive nave, were completed by those who initiated
their erection. The most highly favoured in this respect were finished
in the course of the fourteenth century; but in the greater number of
cases the work dragged slowly on, and reached its end some two
centuries after its inauguration. Reconstructive undertakings were
constantly impeded by wars or social convulsions, which either
hampered or entirely cut off the resources of bishops and architects,
their promoters. Such interruptions were of great service to modern
archæological study, offering as they do distinct evidence of the
various transformations which were successively accomplished from
the so-called Romanesque period to the Gothic.
49. BEAUVAIS CATHEDRAL. APSE
50. BEAUVAIS CATHEDRAL. NORTH FRONT
51. BEAUVAIS CATHEDRAL. TRANSVERSE SECTION
 52. CHARTRES CATHEDRAL. ROSE WINDOW OF NORTH
TRANSEPT

The majority of these great buildings, which show traces of the

vicissitudes through which they passed, bear a strong likeness to
each other, and vary only in detail, according to the skill of their
constructors.
The peculiar interest of Chartres centres in its remarkable
statuary; it has, however, other features which command attention,
such as the rose window of the north, transept and the design of the
flying buttresses. These consist of three arches, one above the other,
the two lower ones being connected by colonnettes, radiating from a
centre, so that the lower arch is related to the upper, as the nave of
a wheel is to the felloes, the colonnettes forming the spokes.
At Mans the arrangement of the choir is so far more remarkable in
that it is extremely unusual, or indeed, in its way unique. The flying
buttresses are planned in the form of a Y (see A on the plan Fig.
53), thus affording space for windows in the exterior wall, to light
the vast circular ambulatory, which at Mans is of unusual
importance, and surrounds the choir with a double aisle. The flying
buttresses which rise above the arcs-doubleaux, bi-furcated (B on
the plan), are over-attenuated in section; their exaggerated height
and proportionate slenderness threaten to make them spring, so
that it has been found necessary to bind them together by ties and
iron chains. Such expedients are a sufficient criticism of the
ingenious but precarious system adopted by the architects of Mans.
53. MANS CATHEDRAL. PLAN
54. MANS CATHEDRAL. FLYING BUTTRESSES OF THE APSE
 55. MANS CATHEDRAL. SECTION OF THE CHOIR

The influence of the Ile-de-France in Normandy is manifest in the

arrangement of choirs and apsidal chapels in Norman cathedrals of
the thirteenth century. The Cathedral of Coutances, a monument of
the eleventh century, was rebuilt in the early
years of the thirteenth century under the impulse given by Northern
France to the architecture of the period. It is in the choir that we
clearly trace this influence, in the double columns of the apse, and
the ingenious disposition of its collateral vaults. But the façade is
purely Norman, not merely in general design, but in the details of
the composition, facsimiles of which may be found in England.

56. COUTANCES CATHEDRAL. NORTH TOWER

The Cathedral of Dol in Brittany, one of the great churches of the

thirteenth century, seems to have escaped the influences of the
Northern innovation. Its general plan, its square apse lighted by
large windows, the details of its architecture and ornamentation, all
proclaim its affinity to the great churches which rose
contemporaneously with it on either side of the Channel, in
Normandy, and in England. It is very probable that it was built by
the same architects or their immediate disciples, working on the
more ancient methods of the Norman schools founded by Lanfranc
at Canterbury towards the close of the eleventh century, on the
model of those he had established in France at the famous Abbaye
du Bec.
 CHAPTER VIII
CATHEDRALS AND CHURCHES OF THE THIRTEENTH
AND FOURTEENTH CENTURIES
The Cathedrals of Rheims, Amiens, and Beauvais excited
extraordinary enthusiasm in their time, not only in the provinces of
France, but among neighbouring nations, notably in England,
Belgium, Germany, Sweden, Spain, and Italy.
This enthusiasm was less fervid in the provinces farthest from the
royal domain; but even in these outlying districts several remarkable
buildings rose in the first half of the thirteenth century, constructed
on the new lines.
In 1233 the Cathedral of Bazas was begun, and, unlike the
majority of such undertakings, was carried through and finished in a
comparatively short time.
57. RODEZ CATHEDRAL. WEST FRONT
58. BORDEAUX CATHEDRAL. CHOIR AND NORTH FRONT
 59. LICHFIELD CATHEDRAL. WEST FRONT

The Cathedral of Bayonne, a contemporary building, shared the

fate of Meaux, Troyes, and Auxerre. It was completed, with one
tower only, in the sixteenth century. In 1248 the foundations of
Clermont Cathedral were laid. The plan provided for six or seven
towers, but the choir was the only portion finished in the thirteenth
century. The transept and four towers, together with a portion of the
nave, were completed in the following century, and the work was
then abandoned until the reign of Napoleon III., who caused it to be
again taken up. The Cathedral of Limoges was begun in 1273, under
the direct inspiration of Notre Dame at Amiens. Down to our own
times it has had to content itself with a choir, a transept, and the
suggestions of a nave, the last of which has lately been completed.
At Rodez a greater perseverance was shown, and the work went
steadily on from 1277 until the Renascence, at which period,
however, the two western towers were left unfinished,
notwithstanding a contemporary description of their magnificence,
which, in a truly Gascon vein, compares them to the Egyptian
pyramids, among other world-renowned marvels.
"In 1272 Toulouse and Narbonne entered the lists against Amiens,
imitating its plan, and proposing to at least equal it in dimensions.
Neither of these undertakings proved happy. Archbishop Maurice of
Narbonne died the same year the works were begun; his successors
took but a lukewarm interest in their progress. In 1320 the sea
retreated, leaving the port on which the wealth of the inhabitants
mainly depended high and dry. Fortunately the choir with its noble
vault 130 feet high was already completed, but the transept walls
were left to fall into ruins. At Toulouse Bishop Bertrand de l'Isle-
Jourdain lived just long enough to carry the work above the triforium
of the choir; it was then abandoned till the fifteenth century. His
successors squandered the revenues of their vast diocese so
shamelessly in pleasures and display that Popes Boniface VIII. and
John XXII., scandalised at their disorders, dismembered their
territory and subdivided it into four bishoprics, granting to the
Bishop of Toulouse the title of archbishop by way of compensation.
But this compensation was of small avail to future zealous prelates
for the carrying out of Bertrand's projects, and the choir of Toulouse
was never finished. It falls short of its predestined height of 130 feet
by 90, and the transept was not even begun.
"The Cathedrals of Lyons, of St. Maurice at Vienne, and of St.
Étienne at Toul have affinities more or less direct with the great
architectural movement. At Bordeaux the building of a great
cathedral was contemplated at the time of the English occupation;
but the choir would never have been finished but for the liberality of
King Edward I. and of Pope Clement V., who had formerly been
archbishop of the town."[11]
[11] Anthyme St. Paul, Histoire Monumentale de la France;
Paris Hachette and Co., 1884.

The great cathedrals constructed in England in the thirteenth

century bear witness to the expansion of French art on the lines
already laid down in the preceding century by the teaching and
achievements of the Norman monkish architects who had followed
William the Conqueror to Great Britain.[12]
[12] This is a very summary way of dismissing the vexed
question of French influence upon English architecture. The
undeniable fact that wherever a French architect can be identified
as the author of an English building—William of Sens at
Canterbury, for instance—the work he did differs entirely in
character from contemporary English work is enough to refute
much of the claim made for France. The principles of Gothic
architecture were the common property of the two countries, and
by each were developed according to their lights.—Ed.
English builders assimilated the constructive principles of the
architects of Anjou and of the Ile-de-France. In the numerous
cathedrals they raised from the thirteenth to the close of the
fifteenth century it is easy to trace the original characteristics of
French art throughout all the transformations or adaptations by
which its methods were modified in accordance with British usages
and ideas.
This influence is very apparent in the Cathedrals of York, Ely,
Wells, Salisbury, and Canterbury, the last of which was constructed
from the plans of an architect or master-mason, known as William of
Sens; in that of Lichfield, where the spires of the façade recall those
of Coutances in Normandy, and above all, at Lincoln, one of the
most beautiful of English cathedrals. Here we have perhaps the most
strongly-marked instance of the steady and continuous filiation
between the buildings of France and England during the so-called
Gothic period. It is quite possible that they were the work of the
same architects, as they certainly were carried out by pupils or
disciples of the same master-builders.[13]
[13] It is difficult to believe that Mons. Corroyer is in earnest in
comparing the spires of Lichfield to those of Coutances, or the
central tower of Lincoln to that of the same French cathedral.
Mons. Corroyer appears to be unacquainted with the line of
filiation between English spires and towers, and so looks, as a
matter of course, for a French mother to such as strike his fancy.
—Ed.

Lincoln Cathedral, founded in the eleventh century, and finished in

1092, shared the fate of so many other timber-roofed buildings of
the period. The greater part of it was destroyed by fire in 1124. It
was rebuilt and enlarged by St. Hugh in accordance with the new
ideas he had brought with him from France, a very natural
consequence of his supervision, when we take into account that as
mandatory of Pope Gregory VII. he had been Bishop of Grenoble.
The church was again partly destroyed by an earthquake in 1185. It
was then rebuilt, enlarged, and completed by Bishop Grossetête, an
Englishman by birth, who had, however, been educated and brought
up in France in the early part of the thirteenth century, and had
carried over with him to his native land the essence of the grand and
noble inspirations which marked that marvellous era.
60. LINCOLN CATHEDRAL. PLAN
 61. LINCOLN CATHEDRAL. WEST FRONT

The lantern-tower at the intersection of the western transept,

which had fallen in 1235, was either rebuilt or finished by Bishop
Grossetête about 1240. In its general outline and in detail it recalls
the great lantern-tower of Coutances in Normandy, which seems also
to have served as model for that of St. Ouen at Rouen in the
fourteenth century.
 The vast and magnificent Cathedral of Lincoln is an admirable
subject for comparative study. Its architecture combines most
strikingly the characteristics of the two nations. It blends in one
harmonious whole the massive solidity of English structure overlaid
with detail, formed by lines vertical, rigid, dry, and hard as iron, and
the mingled grace and strength of French architecture, which may
fitly be compared with gold, in its union of the supple and the
durable, of solidity and power of resistance equal to those of the less
precious metal, with an adaptability to artistic ends far greater.

62. LINCOLN CATHEDRAL. TRANSEPT

 63. LINCOLN CATHEDRAL. APSE AND CHAPTER-HOUSE

In the façade and the west towers English characteristics

predominate, but the choir and the apse are French in composition,
and most probably in execution, as is also the presbytery, in which
both the arrangement and the details of the bays recall those of the
lateral façades of Bourges.[14] All three are veritable masterpieces,
worthy of the most brilliant period of French mediæval architecture.
[14] Here Mons. Corroyer directly traverses the opinion of
Viollet-le-duc, who could see no ground whatever for ascribing a
 French origin to the choir of Lincoln. Indeed, the conception of
that choir, and nearly all its details, are not only unlike, they are
opposed to those of French contemporary examples. Here are the
words of the great French architect: "After the most careful
examination I cannot find, in any part of the Cathedral of Lincoln,
neither in the general design, nor in any part of the system of
architecture adopted, nor in the details of ornament, any trace of
the French school of the twelfth century (the lay school, from
1170 to 1220), so plainly characteristic of the Cathedrals of Paris,
Noyon, Senlis, Chartres, Sens, and even Rouen.... The
construction is English, the profiles of the mouldings are English,
the ornaments are English, the execution of the work belongs to
the English school of workmen of the beginning of the thirteenth
century."—Gentleman's Magazine for May 1861—Letter to
"Sylvanus Urban." The date of Lincoln choir is known. It belongs
to the last years of the twelfth century, and so anticipates such
French work as can show analogies with it, Le Mans, for instance,
where the work in question dates from 1210-1220.—Ed.
In Belgium French influence manifested itself so early as the first
half of the thirteenth century in the building of the remarkable
Church of Ste. Gudule at Brussels. Up to this period the methods of
the Rhenish schools had obtained in the Low Countries, and the
setting aside of these methods in favour of the new system of
France is significant of the high repute of the latter throughout
Western Europe. Further evidence to this effect is to be found in the
great churches of Ghent, Tongres, Louvain, and Bruges among
others, which were either built between 1235 and 1300, or at any
rate begun during this period, to be completed in the fourteenth
century and even later.
 64. BRUSSELS CATHEDRAL (STE. GUDULE). WEST FRONT

Ste. Gudule at Brussels was begun about 1226; but only the choir
and the transept were finished by 1275. The nave was built in the
fourteenth century, together with the towers of the west front,
which, however, were not finally completed till the following century,
or perhaps the sixteenth. Several chapels, the windows of which are
filled with magnificent painted glass, date from the same period as
these towers.
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