Material Misstatement in Intel and The Causes of High Risk

After a careful examination of Intel, the depreciation expense, valuation assertion, and completion assertion for the fiscal year 2016 bear a high risk of material misstatement. The main reason for these assessments is the drastic decrease in the depreciation expense due to an increase in the useful life of certain equipment and machinery from four years to five years. Specifically, the depreciation expense may have been valued incorrectly which would result in a violation of the valuation assertion. Additionally, the deprecation expense reported may not represent the entire depreciation expense which would result in a violation of the completeness assertion.

High Risk Accounts and Assertions

After considering the information in the article, the depreciation expense is at a high risk of being materially misstated. As a result, Intel’s entire net income could also be materially misstated. Depreciation is considered high risk because Intel increased the useful lives of a substantial amount of equipment and machinery from four to five years. Intel estimated the increase in useful life results in a $1.5 billion decrease in annual depreciation expense. $1.5 billion is nearly ten percent of 2015’s pre-tax income. The risk is high because of a combination of the extensive amount of calculations and the large sum of money.

Management’s assertion of valuation has a high risk due to the decrease in depreciation expense. High risk applies to the valuation assertion because management may be incorrect in its decision to increase the useful life of certain equipment. It is possible management increased the useful life while, in fact, the useful life did not need to be increased at all because the original estimate was correct. In this case, the incorrect valuation would not be intentional because the negative implications of the longer life outweigh the short-term increase in net income. The longer useful life could indicate the slowing of innovation.

Management’s assertion of completion also has a high risk. High risk applies to the completion assertion because Intel could have left some of the depreciation expense off of the books after the recalculation. The information regarding certain machinery could have been lost in the shuffle of the recalculation or it could have been left off intentionally. Management could have had the mindset that the depreciation already decreased substantially because of the change of useful life estimate and decreasing the expense even more by leaving some depreciation off the books would go unnoticed.

Audit Procedures

The valuation assertion can be tested by completing substantive procedures on the depreciation expense. Many different substantial procedures can be completed to assure the depreciation is not materially misstated because of a mistake in the valuation. The audit must conclude that the useful life should have increased. Analytical procedures and inquiry should be used to confirm the increase. The audit should examine the financial statements of similar companies with similar equipment and machinery. The comparison will determine if Intel was justified in increasing the useful life. The audit should also inquire the managers and learn why the increase was made and determine if it was necessary. Additionally, the audit should recalculate the depreciation of the equipment in which the useful life increased to ensure the number is not materially misstated. The audit will calculate the depreciation expense for a sample of machines and equipment and then determine if the entire population of machines and equipment is materially misstated.

The completion assertion can be tested by testing controls. Intel should have a control in place that ensures all individual equipment depreciation expense is included in the total depreciation expense. This control will be tested by taking a sample of individual depreciation expenses, increasing the dollar amount, and examining if the total depreciation expense also increased by the same dollar amount. Another way the completion assertion should be tested is by examining the evidence of depreciation and comparing it with the actual depreciation recorded. If there is evidence that is not included in the depreciation recorded, then the completion assertion is violated.