Kadex Corporation Case Summary

Since Kadex Corporation treated the purchase of property, plant, and equipment like a repair and maintenance expense, Jones & Scranton would likely discover the error (even though they are only auditing the third year and the error occurred in years one and two) in a number of ways. First, when the auditors verify the existence of the property, plant, and equipment, they will discover plant and equipment items that are not listed on the assets list. Second, when the auditors determine the completeness of the recorded property, plant, and equipment, they will discover plant and equipment items that were not recorded. Finally, when the auditors determine the appropriate valuation or allocation of property, plant, and equipment, the will find that plant and equipment valuations are not accurate because items are missing.

The year three balance sheet and income statement would reflect a number of errors that would carry forward from the errors made in year one and year two. As …show more content…
As discussed above, the auditor should make sure leasehold improvements are being properly depreciated. If the lease is a capital lease, then depreciating the leasehold improvements over the estimated useful life of the leasehold improvements is proper; however, if the lease is an operating lease, then the leasehold improvements should be depreciated over the term of the lease, which is ten years, not twelve. In addition, the auditor should appraise management's procedure for coming up with the depreciation estimate. The method used for depreciation must be in compliance with generally accepted accounting principles. Whatever method the management chooses, they should use the same method each time. The auditor should verify that management applied the method correctly; it may be beneficial for the auditor to come with up their own depreciation estimate and then compare it to management's depreciation