Evaluation and conclusion: What conclusion would you draw about valuation and allocation of PPE from the above information? Justify your conclusion.

Fabrication Holdings, Inc. (FHI) has been a client of McDonald and McGee LLP for many years. You are an audit senior and have been assigned to the FHI audit for the first time for the financial year ending June 30, 2022. During March 2022, you are completing the audit planning for the property, plant, and equipment (PPE) account class, which is one of FHI’s most material balances. You are also aware that FHI has made a large investment in a new manufacturing process to place itself in a more competitive position. Your analytical procedures indicate an increase in acquisitions of PPE.

You are testing the appropriateness of the depreciation rate assigned to PPE, and whether it is consistent with the present condition and expected use of the assets over their remaining lives. You have sampled 35 PPE items, with a total dollar value of $1, 145, 000. The results show that, for the sample items, some depreciation rates were too low and/or the remaining useful life of the equipment was overstated by management. Together, these issues produce an error in the sample of $48, 500. FHI has a profit before tax for the current year of $1, 875, 000, and a PPE account balance at the end of the year of $11, 345, 000.