Substantive test – Building

I don’t have the kit so do not know what the other options are that this should be the correct answer. To assess the appropriateness of a 5% depreciation rate of a building the auditor is effectively considering a useful life of 20 years – one factor to consider is how many years have already elapsed/have still to elapse – is the remainder an appropriate estimate? To assess this the auditor would consider its physical condition. Suppose there are 7 years remaining but the building is in “poor” condition – unless management has plans for refurbishment (say), 7 years may be optimistic so 5% is too low. Suppose on the other hand that only 3 years remain but the building is well maintained and management has every intention of remaining in it (say it is a head office) for the next 10 years … 5% is too high.

If there were a relocation plan and the property is to be sold, there would be no depreciation from when the asset is classified as held for sale (i.e. sale must be highly probable, etc) – however, it seems rather far fetched to me that the auditor would review board minutes to ensure something like this isn’t there (!)