| Course | ACC 492 Contemporary Auditing II (ACC/492) |
|---|---|
| Week | 3 |
| Paper type | Capital acquisition cycle audit paper |
| Length | about 1,069 words, 4 double-spaced pages plus title page and references |
| Format | APA 7 student paper |
| School | University of Phoenix |
| Program | BS in Accounting |
| Updated | September 2026 |
Free sample paper for ACC 492 Week 3
New Pasteurizers, Hidden Repairs and a Covenant-Bound Loan: Auditing Property Additions and Disposals, Depreciation, Prepaid and Accrued Items and Long-Term Debt at a Composite Dairy Processor
[Student Name]
University of Phoenix
ACC/492: Contemporary Auditing II
Week 3 Assignment
[Instructor Name]
[Date]
The dairy processor, its lender and all figures are composites written for a model paper; standards and research findings come from the sources listed.
A composite dairy processor buys milk from about 90 farms and produces fluid milk, cream and cultured products for grocery chains and schools. This year it replaced two pasteurizers and a bottling line for $6.8 million, financed by a $5 million bank term loan with covenants. It also shut down a yogurt line after losing a private-label contract. The audit team treats property and the loan as the higher-risk accounts in this cycle and prepaid and accrued items as lower risk. Capital spending is where one coding choice can shift a cost from expense to asset or back with a single coding decision, so the auditor tests in both directions. The sections below follow the team's work account by account.
Risks and Assertions
For property, the risks are that recorded additions did not occur or were overstated, that capital items were expensed as repairs, that disposed assets remain on the books, that depreciation is misstated and that idle equipment is impaired. The company's controls over capital spending were evaluated using the COSO components, with particular attention to control activities such as board approval of projects over $250,000 and monthly reconciliation of the fixed asset register (Committee of Sponsoring Organizations of the Treadway Commission, 2013). For the loan, the risks are misstatement of the balance and interest, failure to disclose covenant terms and misclassification if a covenant is breached.
Testing Additions
The team obtained a schedule of the year's additions, $8.1 million, and tied that total to the ledger balance for property. It vouched every addition over $100,000 and a sample of smaller ones to vendor invoices, purchase approvals by the board or plant manager and receiving or installation records, testing existence and accuracy. For the pasteurizer project, it examined the contract, change orders and the engineer's completion certificate and confirmed that freight and installation were capitalized and that operator training was expensed. The team also physically inspected the new equipment on a plant tour.
Searching for Unrecorded Additions
The maintenance department performs both routine repairs and upgrades. The team scanned the repairs and maintenance account, $1.9 million, for items over $25,000 and examined their invoices. It found a $140,000 rebuild of a homogenizer that extended its life by about eight years. Under the company's policy and GAAP, a cost that extends useful life should be capitalized. The team proposed moving it to equipment and recording a small amount of depreciation for the months since the rebuild.
Disposals
The old pasteurizers were sold to a used-equipment dealer. The team examined the bill of sale and cash receipt, confirmed that the assets and their accumulated depreciation were removed and recomputed the loss. It also reviewed the fixed asset listing for items marked as belonging to the yogurt line and discussed with the plant manager which were still in use, since assets no longer used but still recorded can overstate property.
Depreciation
The team recalculated depreciation for the new equipment from the in-service dates and useful lives. For the rest of the fixed asset register, it performed an overall test: depreciation expense for machinery divided by average depreciable machinery cost gave a rate of 8.9%, consistent with the company's average life of about eleven years. The result was within the team's expectation, so no further detailed testing was needed.
The Idle Yogurt Line
The yogurt line, with a carrying amount of $1.3 million, has been idle since March. Idle equipment is an indicator of possible impairment. Management's analysis showed that the undiscounted cash flows expected from selling the line exceeded its carrying amount only if a specialized buyer could be found. The team obtained a dealer's written estimate that the line would sell for about $700,000 and concluded that the carrying amount was not recoverable. Management recorded an impairment loss of $600,000.
Construction in Progress at Year End
One project, a new clean-in-place system for the bottling line, was still under construction at year end, with $420,000 recorded as construction in progress. The team vouched the progress billings, confirmed that no depreciation had been started and reviewed the contractor's schedule for completion in March. Assets not yet in service are not depreciated, and the team checked that none of the completed pasteurizer costs had been left in construction in progress, which would have delayed depreciation.
Prepaid Insurance and Accrued Utilities
These accounts are lower risk, so the team used efficient procedures. For prepaid insurance, it recomputed the unexpired portion of the property and liability policies from the policy documents. For accrued utilities, it compared the December accrual with the January bills paid and with the prior year's accrual adjusted for rate changes. Both balances were reasonable.
Long-Term Debt and Covenants
The team confirmed the loan balance, interest rate, payments made and any collateral directly with the bank and recomputed interest expense for the year. It then tested the two covenants in the loan agreement: cash flow available for debt service must be no less than 125% of the year's scheduled loan payments, and total liabilities may not exceed 2.5 times tangible net worth. Using the audited figures after the proposed adjustments, coverage was 1.41 and liabilities were 2.2 times tangible net worth, both in compliance. Had either been breached without a waiver, the loan might have to be classified as current. Dichev and Skinner (2002) found that covenant violations are common in private lending and that lenders often waive them, which is why the team also asked the bank to confirm that no waivers were outstanding.
Links to the Income Statement
Each balance sheet test also supports an income statement amount: additions and the repairs search support repairs expense, depreciation testing supports depreciation expense, the disposal supports the loss on sale, the impairment supports the loss recognized and the debt work supports interest expense (American Institute of Certified Public Accountants, 2020). Testing the accounts together is more efficient than testing each statement separately.
Conclusion
The audit vouched additions, found a capital rebuild hidden in repairs, confirmed disposals, tested depreciation analytically, supported an impairment of the idle yogurt line, tested prepaid and accrued balances efficiently and confirmed the term loan and its covenants. With the proposed adjustments, property, the selected accounts and long-term debt are fairly stated, and the company remains in compliance with its loan agreement.
References
American Institute of Certified Public Accountants. (2020). Audit evidence (Statement on Auditing Standards No. 142).
Committee of Sponsoring Organizations of the Treadway Commission. (2013). Internal control, integrated framework.
Dichev, I. D., & Skinner, D. J. (2002). Large-sample evidence on the debt covenant hypothesis. Journal of Accounting Research, 40(4), 1091-1123. https://doi.org/10.1111/1475-679X.00083
What the ACC 492 Week 3 instructions ask
The ACC 492 Week 3 task generally asks students to audit property, plant and equipment and related accounts, and often long-term debt and other selected balances. Typical requirements include testing additions and disposals by vouching to supporting documents, analyzing repairs and maintenance expense for unrecorded capital items, recalculating depreciation, considering impairment, testing prepaid expenses and accrued liabilities with analytical procedures and recalculation and confirming notes payable, recomputing interest and reviewing debt covenants. Some prompts include equity accounts or leases. Match every procedure with the assertion and risk it answers, and support the reasoning with standards and research referenced in APA form. Instructors also expect a sentence on why smaller accounts deserve less work.
How this ACC 492 Week 3 example is built
A dairy processor makes these accounts meaningful: it spends heavily on stainless steel equipment, its maintenance crew performs both repairs and upgrades and a bank term loan with covenants financed the new line. The paper begins with the risks, then audits property additions, the repairs account and disposals in turn, with the reasoning for each sample. Depreciation is tested by recalculation and by an overall reasonableness test. Impairment is considered for an idle line. Prepaids and accruals are handled with efficient procedures suited to lower-risk balances. The debt section ends with covenant calculations based on audited figures, because a violation would change the debt's classification and possibly the audit report.
ACC 492 Week 3 grading rubric: where the points go
Faculty generally reward procedures that fit each account's risk, correct direction of testing and attention to connections among accounts. Additions should be vouched to invoices and approvals for existence and accuracy, and repairs expense searched for capital items to test completeness of assets. Disposals need evidence that assets were removed and gains or losses computed correctly. Depreciation should be recalculated or tested analytically. Long-term debt should be confirmed with the lender, interest recomputed and covenants tested, with classification considered. Explaining why lower-risk accounts receive lighter procedures, and naming those procedures, shows judgment. Accurate reasoning, a clear link between the balance sheet tests and income statement amounts and cited sources earn the remaining marks.
ACC 492 Week 3 help: mistakes to avoid
A common ACC 492 Week 3 error is testing only additions and forgetting the reverse risk, capital items expensed as repairs. Search the repairs account for large or unusual items. Another is recalculating depreciation for a few assets without checking overall reasonableness. Divide depreciation expense by average depreciable cost and compare with expected rates. Students also confirm debt balances but ignore covenants; a covenant breach can make long-term debt current. For disposals, look for assets still on the books that are no longer in use. Keep procedures proportional to risk, and say so in the paper. Finally, explain how each balance sheet test also supports an income statement amount.
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- ACC 492 Week 2: Auditing Inventory
- ACC 492 Week 4: Completing the Audit and Reporting
- ACC 492 Week 5: Assurance, Ethics and Liability
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ACC 492 Week 3 questions, answered
What does ACC/492 Week 3 usually cover?
It usually covers auditing property, plant and equipment, including additions, disposals, repairs and depreciation, together with selected accounts such as prepaid expenses, accrued liabilities and long-term debt.
Where can I find a free ACC 492 Week 3 sample paper?
A dairy processor audit of property, selected accounts and a covenant-bound loan is available on this page with margin notes, at no cost. If your prompt uses another company, send its facts; a first draft costs nothing.
Why do auditors examine repairs and maintenance expense?
To find costs that should have been capitalized as assets, since understating assets and overstating expenses is a risk when maintenance staff perform both repairs and improvements.
How is depreciation tested for reasonableness?
By dividing depreciation expense by average depreciable cost for each asset class and comparing the resulting rate with the expected rate from the company's useful lives.
Why do auditors test loan covenants?
A covenant violation can allow the lender to demand repayment, which may require the debt to be classified as current and can raise going concern questions.
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