Fixed-Asset Count: Fifteen Percent Missing at Plant A
You are observing the annual fixed-asset count at three manufacturing plants. The capitalization threshold is $5,000; the register lists 6,200 assets with a net book value of $47 million. At Plant A you tested 60 items: 9 could not be located (15%). The plant controller says they were "probably scrapped during last year's line conversion but not written off." Counts at Plants B and C are scheduled for next week. The engagement budget allows 120 more hours; the audit committee report is due in five weeks, and the external auditor plans to rely on your work. The controller has offered to "find the paperwork" for the nine missing items and has asked you not to write them up until he does.
1. What do the nine exceptions mean, and how do you respond to the controller's request to hold off?
Read the worked answer
The exceptions are an existence failure, not a paperwork failure. An asset that cannot be located is either misstated on the register or was disposed of without recording - both are control breakdowns in the disposal/retirement process, and the second carries a misappropriation risk that the controller's explanation does not address.
Quantify before concluding: 15% of items tested in one plant is far above any tolerable deviation rate. Translate it into a potential misstatement range using gross carrying value and net book value of the sampled misses, and explicitly label any extrapolation as indicative, not a point estimate.
On the request: decline to defer documentation. Facts are recorded when observed, with the controller's explanation attributed to him and dated. If documentation arrives later, it is added as subsequent evidence - it does not erase the observation.
Escalate now: notify the CAE immediately. This is an interim-communication event, and the external auditor's planned reliance means the issue cannot sit until the report is drafted.
2. Do you change the approach for Plants B and C? Defend the change.
Read the worked answer
Yes - the Plant A result invalidates the original expectation of a low deviation rate.
Revised approach:
- Test 100% of high-value assets (the top tranche driving most of the $47M) rather than a random draw.
- Increase the random sample size materially and select across locations, since a 15% miss rate implies the disposal process is broken at a process level, not a plant level.
- Add a process test: pull the year's disposal/scrap records and retirement approvals and trace to register write-offs, and vice versa - the likely root cause is disposals never reaching the register.
- At Plants B and C, ask for the conversion project's scrap lists in advance and match them to the register before the physical count.
Resource trade-off: reallocate hours from lower-risk count procedures (e.g., tagging accuracy) to existence. If 120 hours cannot cover the expanded plan, document the constraint and reduce precision in a stated way rather than silently reverting to the original sample.
Why not simply extrapolate and report: the purpose is to determine whether the register is materially misstated and whether the process can be relied on - that requires evidence from all three plants, not a projection from one.
3. The engagement is running 30 hours over budget and the report is due in five weeks. How do you handle the overrun?
Read the worked answer
Treat the overrun as a consequence of a changed risk assessment, not a performance failure.
Steps: document the trigger (15% deviation at Plant A), the revised procedures, and the incremental hours attributable to the expansion; present the CAE with options rather than a bare request for more budget - reduce scope elsewhere, extend the deadline, or accept a narrower conclusion.
Do not fund the overrun by cutting the expanded existence work. That would make the final conclusion unsupportable and would be visible to the external auditor relying on the file.
The professional point being tested: budgets are planning estimates and must yield to evidence. An auditor who stops testing to hit a budget has let the budget, not the risk, determine the conclusion - and the workpaper record must show that the decision to expand was deliberate and documented.