1. Repairs and maintenance expense has increased significantly compared to the preceding year. The president states that this seems to have been a year with a lot of repairs, in part because their equipment is getting older. What should you do in this situation?
1) Inquire about whether management has documentation in the contract of the real estate taxes not being the responsibility of the client until next year and ask to review that contract. Perhaps examine any public records of tax obligations for the county or municipality to determine the status of outstanding taxes due.
2) Make a recommendation to the client to capitalize all repairs and maintenance invoices larger than $5,000.
3) Ask management to provide invoices from most recent purchases of pipes for construction and estimate the inventory values based on the most recent prices to determine the impact of changes in market conditions on the ending inventory balance.
4) Make inquiries of the client's legal counsel to obtain their views of the likely outcome of the lawsuit.
5) Analyze the aging categories of accounts receivable and recommend that all invoices more than 60 days be written off.
6) Inquire about the nature of repairs made to determine if any represent expenses that should be capitalized. Ask about whether any of the related property, plant, and equipment should be adjusted to reflect permanent impairment and inquire if any equipment that is currently included in the financial statements has been disposed of during the year.
7) Recommend that the client make an accrual for the lawsuit because the client does not want a footnote describing the lawsuit.
8) Calculate accounts receivable turnover and days to collect receivables and compare trends to prior years to determine whether collections are slowing. Analyze aging categories of accounts receivable relative to prior years to evaluate whether receivables are older.