How would you assess the accuracy of depreciation for property, plant and equipment in a real estate development company?

• A. Review depreciation methods, useful lives, residual values, and asset additions/disposals; recalculate depreciation and test for impairment.
• B. Only test additions
• C. Accept management's schedule
• D. Only test disposals

Answer: (C)

Verifying depreciation accuracy hinges on independently validating the calculation against the company’s policies and the underlying asset data. To do this well, you review how depreciation is calculated: the methods used, the estimated useful lives, and the residual values assigned to each asset, as well as any asset additions or disposals that affect the depreciation base. Then you recalculate depreciation expense to ensure it aligns with policy and the actual asset activity, and you test for impairment if there are indicators of reduced value. In real estate development, this matters because long-lived assets and rapid market changes can create impairment risk, so confirming calculations and performing impairment tests when warranted is part of a thorough audit.

Relying on just testing additions misses the ongoing depreciation of existing assets, leaving potential misstatements unaddressed. Accepting management’s schedule without independent verification provides no evidence that the figures are correct. Limiting procedures to testing disposals covers only removals from the books and ignores the depreciation of the remaining asset base.