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 Solutions for Chapter 13

Audit of Long-Lived Assets and Related Expense

Accounts
Review Questions:

13-1. A skeptical auditor will understand that management can manage earnings through fixed-
asset accounts by
• Improperly recording repairs and maintenance costs that should be expensed as fixed
assets.
• Lengthening the estimated useful lives and/or increasing estimated residual value of
depreciable assets without economic justification as was done in the Waste
Management fraud.

The auditor becomes aware of management’s potential by examining all of the fraud risk factors
discussed in chapter 9, as well as incorporating information when the auditor evaluates
internal controls – in particular the control environment.

13-2. Typically, the more relevant assertions (areas of higher risk) in the area of property,
plant, and equipment include existence and valuation. To ensure that these assertions are
not materially misstated, the major elements of strong internal controls over property,
plant, and equipment include:

• The use of a computerized property ledger. The property ledger should uniquely
identify each asset. In addition the property ledger should provide detail on the cost of
the property, the acquisition date, depreciation method used for both book and tax,
estimated life, estimated scrap value (if any), and accumulated depreciation to date.

The auditor can use the ledger to verify the total costs as reflected on the balance
sheet, recomputed depreciation expense, and verify the cost of additions.

• Authorization procedures to acquire new assets. In particular, the use of a capital

budgeting committee to analyze the potential return on investment is a strong control
procedure.

The auditor can use evidence that this procedure is adhered to when verifying the
authorization of additions.

• Periodic physical inventory of the assets and reconciliation with the recorded assets.

The auditor can use the inventory results to help determine the existence of the assets
and proper recording of disposals.

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 • Formal procedures to account for the disposal of assets.

Documentation of these procedures, and adherence to these procedures, helps the

auditor in testing for the completeness of the recording of disposals.

• Periodic review of asset lives and adjustments of depreciation methods to reflect the
changes in estimated useful lives.

Documentation of these reviews and appropriate adjustments helps the auditor in

determining the appropriateness of asset lives and any changes in depreciation
methods.

13-3. A traditional audit of fixed assets focuses on changes in the accounts during the year,
including substantial recalculation of depreciation expense. An integrated audit involves
assessing the controls related to these accounts. If the controls are effective, minimal
direct testing of changes is needed. Rather, the auditor can rely to a great extent on
substantive analytical procedures.

13-4. Analytical procedures that would be helpful in auditing depreciation expense include:

• Current depreciation expense as a percentage of the previous year's depreciation

expense,

• Fixed assets (by class) as a percentage of previous year's assets. The relative increase
in this percentage can be compared with the relative increase in depreciation expense
as a test of overall reasonableness.

• Depreciation expense (by asset class) as a percentage of assets each year. This ratio
can indicate changes in the age of equipment or changes in depreciation policy, or
computation errors.

• Accumulated depreciation (by class) as a percentage of gross assets each year. This
ratio provides information on the overall reasonableness of the account and may
indicate problems of accounting for fully depreciated equipment.

• Average age of equipment (by class). This ratio provides additional insight on the age
of assets and may be useful in modifying depreciation estimates.

If the company is considered high risk, or the analytical procedures do not support
the client’s depreciation expense, the auditor should use audit software to take a sample
of items contained in the detailed property ledger, foot the ledger and agree it to the
general ledger, and then recalculate depreciation for the sample of items chosen.

13-5. Typically, the auditor would be most concerned with the existence and valuation
assertions for fixed asset accounts. These would be considered the more relevant

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 assertions. While the auditor may choose to obtain evidence related to all five assertions,
it is likely that the auditor will need more evidence, or higher quality evidence, for the
relevant assertions than for the other assertions. Identifying and focusing on the relevant
assertions will allow the auditor to be more efficient in the performance of the audit (i.e.,
the auditor will not over-audit the lower risk assertions).

13-6. The audit approaches applicable to identifying and determining the proper accounting of
fully depreciated or idle facilities would include:

• The auditor should tour the client facilities and make inquiries concerning idle
equipment. The auditor should note all idle equipment to be subsequently traced to the
property ledger. Discussions with management about these issues will also be helpful.

• Generalized audit software could be used to develop a schedule of fully depreciated

assets. A sample could be taken and the auditor could attempt to physically observe
the asset and determine whether it is in production and whether a scrap value is
appropriate.

13-7. The auditor requests a schedule of repair and maintenance expense because many clients
are motivated to expense items, rather than capitalize the items. Tax considerations
motivate the expensing of items since repairs and maintenance are deductible for tax
purposes immediately whereas capitalized asset costs must be spread over their
depreciable life.

Repairs and maintenance should also be reviewed because major renovations of assets
that should have been debited to accumulated depreciation may have erroneously been
charged to repairs expense.

13-8. Many companies have such policies based on materiality of the items acquired and the
cost of maintaining detailed records for immaterial items. The auditor would need to
determine the reasonableness of each company's policy and whether the policy is
followed consistently. The $500 limit policy explained by the controller appears to be
reasonable.

13-9. The client has a policy that apparently has been used for a number of years. Assignment
of assets to classes for depreciation purposes is common and represents an expedient
method of dealing with depreciation issues. The auditor can determine the reasonableness
of the classification schemes by:

• Reviewing previous data on the asset's productive life (within each category), and

• Reviewing IRS guidelines for classification and reasonableness in comparison with the
company's categories and life guidelines.

• Noting significant gains/losses on disposal.

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13-10. The auditor has the responsibility to determine that the estimated useful lives of new
fixed assets are reasonable. Approaches to determining reasonableness include:

• Analyzing management’s historical estimates for similar assets and comparing those
estimates with the actual useful lives of existing assets.

• Comparing the useful lives with those used by other companies in the same industry.

• Comparing the useful lives with IRS guidelines.

• Using professional judgment.

13-11. Asset impairment is meant to identify a group of assets that are no longer productive. The
assets are not expected to produce economic benefits equal to their carrying cost. Thus, it
is argued that the assets should be written down to their net realizable value measured
either by their disposal value or the economic benefits expected to be produced from the
assets. The concept of the write-down is consistent with the general principles of
accounting for assets that have value less than their cost.

The major audit issues involved with asset impairments include:

• Management may abuse the impairment concept. In particular, a new management

team may be anxious to write-off old assets in order to get "all the bad news behind
them." In such cases future earnings will be better because the asset charges have
been allocated to a past period. The auditor must determine that the asset write-downs
are based on economic factors, not management's desire to manipulate future reported
profits.

• It is difficult to estimate the net realizable value of many assets.

• The asset impairment adjustment might be applied on a divisional basis rather than an
individual asset basis. The overall adjustment will have to be allocated to individual
assets.

13-12. A recoverability test involves estimating the future cash flows from the asset to determine
if that estimate is less than the carrying value of the asset. If it is, the asset has been
impaired and should be written down.

13-13. The general concept of valuing impaired assets has been developed by the FASB and
consists of two major approaches:

• Estimating the future economic benefits to be derived from the asset. The auditor
would evaluate management’s assumptions and estimates for reasonableness.

• Obtaining an independent appraisal of current value. The auditor could either assess
the competence and independence of the appraiser hired by management and the

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 reasonableness of the assumptions used or the auditor could obtain an independent
appraisal of the value of the asset.

13-14. The auditor must make sure the appraisal is reasonable. The auditor should consider the
qualifications and certification of the appraiser and appropriateness of the assumptions
used by the appraiser. The auditor may need to use a specialist within the audit firm, or
an expert that is hired from outside the firm, to assist with these audit procedures.

13-15. The most difficult audit issues involved in the patent area include:

• Costs may be difficult to assign.

• Useful and legal life of the patent may be difficult to verify.
• Patents face impairment issues that may be complex and tied to litigation.

13-16. The concepts of auditing natural resources are fairly straight forward and consistent with
accounting for other long-lived assets. The cost of the natural resources is to be allocated
to the periods in which the resources are used (sold). It is the implementation of the
concept that causes difficulty. Specific issues include:

• The cost of the acquired assets may not be easy to identify. For example, the oil and
gas industry had a great controversy over how the costs of drilling dry holes ought to
be accounted for when there is a plan to drill many wells in an area in search for the
oil.

• It may be difficult to estimate the amount of resources contained in a mine or an oil

well. The company will have to rely on geologists for estimates of the number of
barrels of crude oil and quality of oil, or the number of ounces of gold in a newly
acquired gold mine.

• Changing technology might allow the mining of resources that were not estimated to
be economically mined when the natural resources were first discovered.

• There may be changes in the estimate of natural resources at a particular location as

the mining proceeds. The changes will affect the client's depletion rate.

• The company may be responsible for the costs of reclamation, i.e. the costs to restore
the site to its original condition before mining, or in a condition that is suitable for
public recreation or other purposes.

13-17.

Comparison of Worldwide Professional Guidance

USING THE WORK OF AN OUTSIDE SPECIALIST/EXPERT

5|Page
AICPA SAS 73 Using the Work of a Specialist
Auditing As part of the AICPA’s Clarity Project, the ASB has issued a Proposed SAS on
Standards Using the Work of an Auditor’s Specialist with the comment period ending April
Board (ASB) 2010). The proposed standard is nearly equivalent to ISA 620.

Public The PCAOB adopted AU Section 336 as an interim standard in 2003. This is the
Company same standard as SAS 73. Note that once the AICPA issues its new standard,
Accounting there will be divergence in the U.S. regarding guidance on this topic, as the new
Oversight AICPA standard will more closely resemble the guidance provided by the
Board IAASB.
(PCAOB)
International ISA 620 Using the Work of an Auditor’s Expert
Auditing and
Assurance Highlights of this standard include the following:
Standards • The auditor must have sufficient understanding of the subject-
Board matter to evaluate the adequacy of the expert’s work
(IAASB)
• In evaluating the adequacy of the expert’s work, the auditor should
determine:
(a) The relevance and reasonableness of the expert’s findings or
conclusions,
and their consistency with other audit evidence;
(b) If the expert’s work involves use of significant assumptions and
methods, the relevance and reasonableness of those assumptions and
methods in the circumstances;
(c) If the expert’s work involves the use of source data that is significant to
that expert’s work, the relevance, completeness, and accuracy of that
source data.
• If the auditor determines that the expert’s work is inadequate, the
auditor should:
(a) Agree with the expert on the nature and extent of further work to
be performed by the expert or
(b) Perform additional audit procedures appropriate to the
circumstances.

SUMMARY The three sets of professional guidance on this topic are similar. One difference is
in terminology: the IAASB uses the term “expert”, while the U.S. regulators use
the term “specialist”. All of the Standards require the auditor to understand the
role, knowledge, and objectivity of the specialist and how the specialist’s work
affects important financial accounts.

6|Page
13-18. Companies engage in leasing transactions for a variety of reasons. Most of the reasons
are economic, but in some cases, achieving a particular financial statement treatment
motivates the lease transaction. Some of the reasons for leases include:

• To finance the purchase

• To acquire the use of the asset for relatively short periods of time without having to
buy and then sell it.
• To acquire the use of the asset for an extended period of time, but keep the asset and
related liability off of the balance sheet.
• To maintain a flexible operating profile, i.e. substitute short-term variable costs for
fixed costs.

13-19 The benefits of leasing assets for less than their economic life could include (a) avoiding
the hassle of formally buying and then later selling the assets, (b) spreading the cash
outflow over the lease period rather than paying for it at the beginning, and (c) avoiding
including the asset and related lease obligation on the balance sheet. The key
performance ratios affected are:

• A lower debt/equity ratio and

• A higher return on total assets

13-20. Current accounting principles in the U.S. require that leases should be capitalized if they
meet at least one of four conditions:

1. The present value of the minimum lease payments is at least equal to 90 percent of
the asset’s fair market value.
2. The lessee can acquire title to the asset at the end of the lease for a bargain purchase
price.
3. The lease term covers at least 75 percent of the useful life of the asset.
4. The lease transfers ownership to the lessee by the end of the lease term.

13-21. The auditor should determine the economic life of a leased asset in order to help
determine whether it is a capital or operating lease and to determine the period over
which to depreciate the leased asset in situations in which the economic life is less than
the lease period.

13-22. The audit approach for leases should include the following procedures:

1. Obtain all copies of lease agreements, read the agreements, and develop a schedule of
lease expenditures, bargain purchases, etc.
2. Review the lease expense account, select entries to the account and determine if there
are entries that are not covered by the leases identified in step 1. Review to determine
if the expenses are properly accounted for.
3. Review the four criteria from SFAS #13 and determine if any of the leases meet the
requirement of capital leases.

7|Page
 4. For all capital leases, determine that the assets and lease obligations are recorded at
their net present value. Determine the economic life of the asset. Calculate
amortization expense, interest expenses, and determine any adjustments to correct the
financial statements. Consider bargain purchase agreements to determine the
economic life for depreciation purposes.
5. Develop a schedule of all future lease obligations, or test the client’s schedule by
reference to underlying lease agreements to determine that the schedule is correct.
6. Review the client’s disclosure of lease obligations to determine that it is in accordance
with GAAP.

The auditor may also choose to confirm the existence and terms of the lease with the lessor.

Multiple Choice Questions:

13-23. e.
13-24. c.
13-25. c.
13-26. d.
13-27. c.
13-28. b.
13-29. a.
13-30. c.

Discussion and Research Questions:

13-31.

Control Procedure Purpose of Control Impact on Substantive Audit

Procedure Procedures

1. Periodic physical Ensure that records reflect Auditor should expand

inventory of assets. equipment on-hand and procedures either by taking a
in use. sample from the property
ledger and verifying
existence or take a tour of
plant and identify idle
equipment for future review
(or both procedures.)

2. Policy to classify Ensure consistent use of Auditor would have to review

equipment and compute depreciation methods each equipment life for
depreciation. based on experience of consistency and rationale for
client. Provide the life chosen.
efficiency in processing.

3. Policy on minimum Promote processing There is no particular effect on

8|Page
 Control Procedure Purpose of Control Impact on Substantive Audit
Procedure Procedures
amounts that are to be efficiency by expensing the audit except that the PPE
capitalized. small dollar value items. ledger would be substantially
larger and smaller items
would be included in the
audit samples.

4. Method for designating Ensure the records are Auditor would expand
scrap or idle equipment updated for change in production facilities tour with
for disposal. productive life of assets. special emphasis on
identifying obsolete or non-
productive assets. The items
identified would be discussed
with management in order to
determine if adjustments are
needed.

5. Differentiate major Ensure the proper Expand review of repairs and

renovations from repair accounting since major maintenance expense.
and maintenance. renovations may extend Investigate all large
the life of the asset and expenditures to determine if
should be debited to they are more appropriately
accumulated classified as renovations.
depreciation.

6. Self-construction of Ensure proper accounting Perform a detailed review of all

assets. for self-constructed self-constructed assets.
assets.

7. Systematic review for Ensure proper accounting Auditor would have to review
asset impairment. for asset impairment. asset productivity each year
Company performing and make inquiries of client of
the review on a the accounting for impaired
consistent basis is a assets. Auditor would be more
strong control because it alert to declining productivity
eliminates many of the indicators or changes in
"big bath" write-offs. product mix that might affect
asset values.

8. Management Ensure up to date Auditor should review asset

periodically reviews accounting. disposals for potential impact
disposals for potential on choice of economic lives
impact on changing for assets.
asset lives for

9|Page
 depreciation purposes.

10 | P a g e
13-32.

a. & b. Audit program and potential use of generalized audit software:

a. Audit Program b. Use of Generalized Audit Software

1. Take a sample of items from the property 1. Audit software could be used to read the
ledger and trace to the property noting the file, foot the file and agree to the general
correct physical identification. ledger, and select the sample for
independent verification.
2. Trace items observed during the taking of 2. Generalized audit software could not be
the physical inventory to the client's used for this.
records.
3. Take a sample of items from the property 3. Audit software could be used to select the
ledger and trace to invoices, construction sample and to evaluate sample results.
contracts, etc. to verify the correctness of The auditor would most likely use PPS
the cost recorded. sampling.
4. For the items sampled in step 3, determine 4. Sample was taken in step 3. Differences
that the asset has been appropriately can be evaluated using the sample
classified according to the company policy evaluation tools contained in the audit
determining asset classification. software.
5. Take a sample of items and recompute 5. Audit software could be used to both take
depreciation for both book and tax the sample and to reperform the
purposes. depreciation calculation. The software
could also foot the depreciation file and
compare with the recorded depreciation
for the year.
6. On a sample basis, recalculate 6. Same as step 5.
accumulated depreciation and compare
with client's recorded values.
7. Evaluate the client's estimate of 7. Audit software would not be used for this
depreciable lives for reasonableness. procedure.
8. Investigate major write-downs or 8. Audit software could be used to prepare a
renovations to determine their list of all renovations or asset write-
reasonableness. downs for subsequent investigation.
9. Determine any needed adjustments and 9. Audit software would not be used here.
trace the figures to the trial balance.

c. If the client had not taken a physical inventory, the auditor would have to take an
extensive sample of items listed on the client's physical inventory and would have to
trace the items back to the individual assets. This would be extremely difficult if the
client had not uniquely identified each item.

11 | P a g e
13-33.
Compute the average balance: ($380,500 + $438,900) / 2 = $409,700
Adjust for the salvage value: $409,700 * .9 = $368,730
Compute the annual depreciation expense: $368,730 / 6 = $61,455.

Once the auditor has developed an expectation of the account balance, the auditor will
compare that expectation with the amount recorded by the client. If the difference
between the two amounts is less than the threshold (based on level of materiality) set by
the auditor, the auditor would conclude that the recorded depreciation expense is
reasonable. Although the problem did not provide details on the auditor’s threshold, it is
reasonable to believe that the difference between the auditor’s expectation and the
client’s recorded amount in this problem would be below that auditor’s threshold. Thus,
the auditor would likely conclude that the recorded depreciation expense of $60,500
appears reasonable. Given the results of this substantive analytical procedure, the auditor
will likely not need to perform any additional substantive tests of details.

13-34.
a. Audit Evidence to Support b. Audit Implications if Conclusion is
Conclusion Correct
1. Previous experience of client with this 1. The auditor would consider the need to
type of asset including length of recommend a change in depreciation
useful life and decline in service policy to the client. Most clients,
value or increase in maintenance however, are reluctant to make such
costs during the latter years of the changes unless there is persuasive
assets life. evidence on the need for such a change.

A secondary source might be IRS

guidelines on useful life of assets.
IRS guidelines do not dictate
accounting procedures but might be
a good indication of useful life.

2. Examination of insurance policies and 2. The client should consider the need to
inquires of management. develop a reserve for self-insurance on
the assets. The auditor should consider
whether a pay-as-you-go policy for
equipment damage would materially
misstate the financial statements.

3. Examination of agreement with the 3. Depending on the likelihood of the

town regarding the donated capital. company remaining in the town, the
auditor should consider the need to show
Examination of independent appraisal the contingency in a footnote. If it is
as a basis for determining the fair likely the company will remain in the
market value. town for the ten years, the auditor should
disclose the basis for the initial valuation

12 | P a g e
 a. Audit Evidence to Support b. Audit Implications if Conclusion is
Conclusion Correct
of the asset.
4. Observation of idle equipment during 4. The company should write the
a plant tour by the auditor. Inquiry of equipment down to its estimated net
management and plant personnel as realizable value unless sufficient
to the reason the equipment is idle evidence exists that the assets will be
and future plans for using the used in future production at a rate
equipment. initially planned when the asset was
acquired.

5. Examination of support for the debit 5. The auditor should perform follow-up
to the warehouse. The auditor would auditing procedures to determine if:
also examine support to determine
that labor costs were properly * overhead was properly applied to the
charged to the warehouse cost of construction.
construction.
* interest cost should be capitalized.

The estimated useful life and choice of

depreciation method should also be
reviewed.

6. Review of significant repair and 6. There is a question as to whether the

maintenance expense during the year charge to repair and maintenance is the
and subsequent examination of proper accounting. Since the life of the
individual charges. asset is extended and the cost of the
overhaul is significant, the auditor and
client should consider reclassifying the
cost from an expense to a debit to
accumulated depreciation.
7. Review of support for a material gain 7. This is obviously a related party
on sale account. Review of the transaction and should be disclosed as
financing of the contract and review such. The auditor should also examine
of books to determine historical cost. the substance of the transaction to
determine whether the gain should be
recognized. Even if it is disclosed as a
related party transaction, there may be
sufficient question as to whether the gain
should be recognized.

13 | P a g e
13-35.
WorldCom
Telecommunications and Line Capacity

Broad Detailed Assertions for the Audit Evidence to be Gathered

Assertion Audit of this Account
Existence All of the recorded assets exist. Review of purchase documents –
take a statistical sample of additions
to fixed assets and review
underlying supporting
documentation.
Observe the new additions to
fixed assets.
Rights and The company has the rights to Review purchase contracts.
Obligations use all the assets that have been Inquire of leaseholders, if any.
added during the year for the Review swap contracts for line use
use intended. to determine if there are any
special restrictions.
Valuation and All of the fixed assets have been Take a MUS sample of major
Allocation recorded correctly at cost. additions during the year.
Depreciation has been computed Review all selected transactions to
based on economic life and determine if correctly recorded.
estimated use of the assets.
Examine the useful life suggested
for the assets to determine
reasonableness. Compare useful life
with other companies in the
industry.

Recompute depreciation on both the

new assets as well as existing assets
(because the company has been
labeled a high risk audit).

Foot the additions and review the

entries to the fixed asset additions
to determine that amounts are
recorded correctly.
Presentation There is proper disclosure of Review the company notes to
and Disclosure depreciation methods used. determine that disclosures are
consistent with methods used.

14 | P a g e
13-36.
1. Yes, it would be highly unusual for debits to fixed assets to come from journal
entries. Most debits to fixed assets should come from purchases of the assets and
should be evidenced by invoices and contracts. The auditor should view significant
amounts of debits to fixed asset as “high risk” and should investigate all of the entries
if the aggregate amount could be significant or material.

2. No, entries to depreciation expense and accumulated depreciation should normally

come from journal entries. However, the journal entries should come from an
automated computer program. Thus, the auditor should trace the summary entries
back to the detail computation for specific items.

3. An explanation of “Capitalization of line capacity per CFO, amounts were originally

incorrectly recorded as an expense” is a highly unusual transaction. The auditor
should be highly skeptical because it does not appear to be supported by outside,
objective evidence. The client claims it is misclassified as an expense. The auditor
should seek the following evidence:

• Ask the client to examine the original invoice, contract, and other information
associated with the original payment for the goods, services, or fixed asset.
• The auditor should examine the invoice to determine the nature of the purchase.
• The auditor should determine that the document that is examined was not used to
support other purchases, i.e. the auditor should be suspicious of the information
because it is all obtained internally. The auditor should be concerned that one
invoice might serve as support for this journal entry and another purchase.
• The auditor should use generalized audit software to prepare a list of all other
purchases from the vendor. The auditor should trace the purchases to invoices and
to proper recording in the accounts.
• The auditor should consider confirming the total amount of purchases with the
outside vendor.

Significant differences should be recorded as misstatements and projected to the

statements as a whole. If the auditor has suspicions that other such misstatements
might exist in the accounts, the auditor should use GAS to schedule all entries to the
account balance that comes from other than the purchase journal and should
investigate all of the entries in a similar manner.

13-37.
a. Items 1 through 6 would have been found in the following way:

1. The company's policies for depreciating equipment are available from several
sources:

a) The prior-year's audit working papers and permanent file.

b) Footnote disclosure in the annual report and SEC Form 10-K.
c) Company procedures manual.

15 | P a g e
 d) Detailed fixed asset records.
e) Inquiry of relevant client personnel.

2. The ten-year lease contract would be found when supporting data for current year's
equipment additions were examined. Also, it may be found by a review of company
lease and contract files.

3. The building wing addition would be apparent by the addition to buildings during the
year. The use of the low construction bid amount would be found when support for
the addition was examined. When it was determined that this inappropriate method
was followed, the actual costs were determined by reference to construction work
orders and supporting data. The wing was also physically observed by the auditor.

4. The paving and fencing was discovered when support was examined for the addition
to land. These costs should be charged to Land Improvements and depreciated.

5. The details of the retirement transactions were determined by examining the sales
agreement, cash receipts documentation, and related detailed fixed asset record. This
examination would be instigated by the recording of the retirement in the machinery
account or the review of cash receipts records.

6. The auditor would become apprised of a new plant in several ways:

a) Volume would increase.

b) Account details such as cash, inventory, prepaid expenses, and payroll would be
attributed to the new location.
c) The transaction may be indicated in documents such as the minutes of the
board, press releases, and reports to the stockholders.
d) Property tax and insurance bills examined show the new plant.
e) Inquiry of appropriate client personnel.

One or more of these occurrences lead the auditor to investigate the reasons and
circumstances involved. Documents from the city and appraisals would be examined
to determine the details involved.

b. The appropriate adjusting journal entries are as follows:

1. No entry necessary.

2. This is an operating lease because it is cancelable with a 60 day notice and should
not have been capitalized.

Dr. Prepaid rent $ 5,000

Dr. Lease liability 35,400
Dr. Allowance and depreciation-- 2,020
machinery and equipment

16 | P a g e
 Cr. Machinery and equipment 40,400
Cr. Depreciation expense 2,020

To correct initial recording of lease.

Dr. Equipment rent expense $ 3,750

Cr. Prepaid rent $3,750
To record nine months rent:
9/12 x $5,000 = $3,750

3. The wing should have been recorded at its cost to the company.

Dr. (Accounts originally credited) $1,500

Cr. Buildings $1,500
To correct initial recording of a new wing at its cost rather than the outside
bid.

Dr. Depreciation expense $ 290

Cr. Allowance for depreci-
ation--buildings $ 290
To correct depreciation for excess cost.

Depreciation on beginning balance.

120,000/25 = 4,800

Depreciation recorded on addition

5,150 - 4,800 = 350

Correct depreciation for addition:

Remaining useful life of addition at the beginning of the year is 12
½ years (60,000/120,000 x 25 =
12 ½ years; (25 – 12 ½ = 12 ½)

Depreciation = $16,000/12 ½ / 2 = $640

Correction = $640 - $350 = $290

4. The paving and fencing are land improvements and should be depreciated over
their useful lives.

Dr. Land improvements $5,000

Cr. Land $5,000
To correct initial recording of paving and fencing.

Dr. Depreciation expense $ 250

Cr. Allowance for depreci-
ation--Land Improvements $250

17 | P a g e
 To record first year's depreciation on paving and fencing.
$5,000/10 / 2 = $250

5. The cost and allowance for depreciation should have been removed from the
accounts and a gain or loss on sale recorded separately into income.

Cost of asset $48,000

Allowance for depreciation:
Through 2005: 48,000/10 x 7 ½ $36,000
For 2006: (48,000/10)/2 2,400
38,400
Net book value 9,600
Cash proceeds 26,000
Gain on sale $16,400

Depreciation expense for 2007 should be $2,400 rather than the

$3,500 that was recorded.

The correcting entry is:

Dr. Allowance for depreciation--

Machinery and Equipment $39,500
(36,000 + 3,500)
Cr. Machinery and Equipment $22,000
Cr. Depreciation expense
(3,500 – 2,400) 1,100
Cr. Gain on sale 16,400

6. Donated property should be capitalized at its fair market value.

Dr. Land $10,000

Dr. Buildings 40,000
Cr. Contributed capital-
Donated Property $50,000
To record land and buildings for new plant donated by Crux City.

Dr. Depreciation expense $800

Cr. Allowance for depreciation-
-Buildings $ 800
To record depreciation on new plant.

$40,000/25 / 2 = $800

18 | P a g e
13-38.
a. The controller's arguments merit consideration, but GAAP still requires adherence
to the historical cost principle. The client may consider disclosing the geological
estimates of the natural resource, but it would be a GAAP departure to record the
asset at market value.

b. There should be a geologist's report that was used to estimate the amount of gold.
The auditor may use the company's expert's estimate or may consider having
another specialist corroborate the finding. Since the geologist operates
independently of management and follows defined procedures in making the
estimate, most audit firms are comfortable in relying on their estimates. If the
auditor does rely on the work of the company’s expert, the auditor will want to
take steps to ensure that the expert has the appropriate skills, training,
qualifications, etc.

c. GAAP does not specify the depreciation method when a mining installation is set
up explicitly to mine the gold. It would be reasonable to include the $250 million
cost in the depletion schedule. The cost of getting an ounce of gold to the market
would include the discovery cost and the allocated share of capital equipment
used to mine the asset.

13-39.
a. Substance versus form is an important accounting and auditing concept. The
auditor is guided by the economic substance of a transaction - not merely its form.
In this particular situation, the auditor has two important substance questions to
examine:

1. Is the contract really a sale and leaseback?

2. If it is a lease, is it in essence the purchase of the asset? If yes, should it be

recorded as a capital lease rather than an operating lease?

b. The remaining audit work should include:

1. Review the contract to determine if the lease should be recorded as a sale-

leaseback or as a lease. Determine whether the lease should be recorded as a
capital lease rather than an operating lease.

2. Review the lease and schedule subsequent payments for footnote disclosure.

3. Use substantive analytical procedures to estimate the lease expense for the
year. Compare the estimated expense with the lease expense recorded and
investigate any differences.

4. Vouch the payments made on the lease and determine if the client is behind
schedule on payments. Determine if a liability should be recorded.

19 | P a g e
13-40.

1 and 2.

Account 1. Nature 2. Cause of Increase

Leasehold Improvement Asset Adding new walls, partitions, flooring, etc. to
leased property
Leased Equipment Asset Acquiring additional leased equipment under
capital lease.
Lease Expense Expense Acquired the use of new equipment under
operating leases or an increase in the annual
rent expense when existing operating leases
are renewed.

3. The first account (leasehold improvement) is the actual construction of assets to

leased property. It includes the purchase of property that is used to make leased assets
more useable for the purpose for which the property was leased. It is a long-term asset
that should be amortized over its expected life or the life of the lease, whatever is
shorter. It has no direct bearing to the lease expense account.

The second account (leased equipment) is similar to the lease expense in that both are
caused by the client entering into a lease agreement for the use of an asset. The
difference is that the leased equipment meets the criteria of SFAS 13 such that it is
inferred that it is essentially the purchase of an asset. Therefore the asset should be
recorded on the financial statements and amortized over the life of the lease. In
addition, the present value of the future payments should be recognized as a liability
on the financial statements. The periodic lease payments should reduce the liability
and recognize lease expense.

4. Audit Program for Accounts:

a. Develop a list of all additions to leasehold expense and leased equipment during
the year, as well as a list of all new operating lease contracts.

b. Discuss with management their strategy for entering into lease contracts rather
than building or purchasing the assets.
c. Take a MUS sample of all new additions and:
• examine the underlying invoice for leasehold improvements to determine that
the improvement is properly valued at cost.
• examine the underlying lease contract for leased equipment and lease
expensed items to determine that (a) it is properly classified as an operating
lease or a (b) capital lease.
• recompute the present value of the asset and liability of the leased equipment.
• schedule any items that are not recorded correctly and use PPS sampling to
project error to account balances to determine if amounts are material.

20 | P a g e
Another random document with
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Again they lapsed into silence. And all round them, subject to blind
taciturn laws, and heedless of man, myriads of things were
happening, in the grass, in the trees, in the sky.
Luke yawned and stretched himself. "It must be getting near dawn,"
he said.
They had successfully doubled the dangerous cape of midnight, and
he began to feel secure of safely weathering what remained of their
dark voyage.
It was the hour when night-watchers begin to idealize their bed, and,
with Sancho Panza, to bless the man who invented it. They
shuddered, and drew their cloaks closer round their shoulders.
Then, something happened. It was not so much a modification of the
darkness, as a sigh of relief, a slight relaxing of tension, so that one
felt, rather than saw, that the night had suddenly lost a shade of its
density ... ah! yes; there! between these two shoulders of the hills
she is bleeding to death.
At first the spot was merely a degree less black than the rest of the
sky. Then it turned grey, then yellow, then red. And the earth was
undergoing the same transformation. Here and there patches of
greyness broke out in the blackness of the grass, and after a few
seconds one saw that they were clumps of flowers. Then the
greyness became filtered with a delicate sea-green; and next, one
realized that the grey-green belonged to the foliage, against which
the petals were beginning to show white—and then pink, or yellow,
or blue; but a yellow like that of primroses, a blue like that of certain
wild periwinkles, colours so elusive that one suspects them to be due
to some passing accident of light, and that, were one to pick the
flower, it would prove to be pure white.
Ah, there can be no doubt of it now! The blues and yellows are real
and perdurable. Colour is steadily flowing through the veins of the
earth, and we may take heart, for she will soon be restored to life
again. But had we kept one eye on the sky we should have noticed
that a star was quenched with every flower that reappeared on earth.
And now the valley is again red and gold with vineyards, the hills are
clothed with pines, and the Dapple is rosy.
Then a cock crowed, and another answered it, and then another—a
ghostly sound, which, surely, did not belong to the smiling,
triumphant earth, but rather to one of those distant dying stars.
But what had taken Ranulph? He had sprung to his feet and was
standing motionless, a strange light in his eyes.
And then again, from a still more distant star, it seemed, another
cock crowed, and another answered it.
"The piper! the piper!" cried Ranulph in a loud triumphant voice. And,
before his astonished companions could get to their feet, he was
dashing up one of the bridle-paths towards the Debatable Hills.
 CHAPTER XXI
THE OLD GOATHERD
For a few seconds they stood petrified, and then Luke was seized
with panic, and, calling to the little boys to stay where they were,
dashed off in pursuit.
Up the path he pounded, from time to time shouting angrily to
Ranulph to come back, but the distance between them grew ever
wider.
Luke's ears began to sing and his brain to turn to fire, and he
seemed to lose all sense of reality—it was not on the earth that he
was running, but through the airless deserts of space.
He could not have said how long he struggled on, for he who runs
hard leaves time behind as well as space. But finally his strength
gave way, and he fell, breathless and exhausted, to the ground.
When he had sufficiently recovered to think of starting again the
diminishing speck that had been Ranulph had completely vanished.
Poor Luke began to swear—at both Ranulph and himself.
Just then he heard a tinkle of bells, and down the bridle-path came a
herd of goats and a very ancient herdsman—to judge, at least, from
his bowed walk, for his face was hidden by a hood.
When he had got up to Luke, he stood still, leaning heavily on his
stick, and peered down at him from underneath the overhanging flap
of his hood with a pair of very bright eyes.
"You've been running hard, young master, by the looks of ye," he
said, in a quavering voice. "You be the second young fellow as what
I've seen running this morning."
"The second?" cried Luke eagerly. "Was the other a little lad of about
twelve years old with red hair, in a green leathern jerkin embroidered
in gold?"
"Well, his hair was red and no mistake, though as to the jerkin...."
And here he was seized with a violent attack of coughing, and it took
all Luke's patience not to grab him by the shoulders and shake the
words out of him.
"Though as to the jerkin—my eyes not being as sharp as they once
were...."
"Oh! never mind about the jerkin," cried Luke. "Did you stop and
speak to him?"
"But about that jerkin—you do cut an old man short, you do ... it
might have been green, but then again it might have been yellow.
But the young gentleman what I saw was not the one as you're
after."
"How do you know?"
"Why, because he was the Seneschal's son—the one I saw," said
the old man proudly, as if the fact put him at once into a superior
position to Luke.
"But it's the Seneschal's son—Master Ranulph Chanticleer, that I'm
after, too!" cried Luke, eagerly. "How long is it since you saw him? I
must catch up with him."
"You'll not do that, on your two feet," said the goatherd calmly. "That
young gentleman, and his yellow jerkin and his red hair, must be well
on the way to Moongrass by now."
"To Moongrass?" And Luke stared at him in amazement.
"Aye, to Moongrass, where the cheeses come from. You see it was
this way. I'm goatherd to the Lud yeomanry what the Seneschal has
sent to watch the border to keep out you know what. And who should
come running into their camp about half an hour ago with his red
jerkin and his green hair but your young gentleman. 'Halt!' cries the
Yeoman on guard. 'Let me pass. I'm young Master Chanticleer,' cries
he. 'And where are you bound for?' cries the Yeoman on guard. 'For
Fairyland,' says he. And then didn't they all laugh! And the little chap
flew into quite a rage, and said he was off to Fairyland, and no one
should stop him. And, of course, that just made them laugh all the
more. But though they wouldn't let him go to Fairyland, the young
rascal...." And here the old man was seized with a paroxysm of
wheezy laughter which brought on another bout of coughing.
"Well, as I was saying," he went on, when he had recovered, "they
wouldn't let him through to Fairyland, but they said they would ride
back with him where he came from. 'No, you won't,' says he; 'my
dad,' says he, 'don't want me to go back there, never any more.' And
he whisks out a letter signed by the Seneschal, bidding him leave
the widow Gibberty's farm, where he was staying, and go straight off
to Farmer Jellygreen's at Moongrass. So one of the Yeomen saddled
his horse, and the youngster got up behind him, and they set off for
Moongrass by one of the cattle-paths running northeast, which
comes out at about the middle of the road between Swan and
Moongrass. So that's that, my young fellow." In his relief Luke tossed
his cap into the air.
"The young rascal!" he cried joyfully; "fancy his never having told me
he'd got a letter from his Worship, and me expecting that letter for
the last three days, and getting stomach-ache with worry at its not
coming! And saying he was off to a certain place, too! A nice fright
he's given me. But thank'ee, gaffer, thank'ee kindly. And here's
something for you to drink the health of Master Ranulph
Chanticleer," and with a heart as light as a bird's, he began to retrace
his steps down the valley.
But what was that faint sound behind him? It sounded suspiciously
like the Ho, ho, hoh! of that impudent Willy Wisp, who for a short
time, had been one of his Worship's grooms.
He stopped, and looked round. No one was visible except the old
goatherd in the distance, leaning on his stick. What he had heard
could have been nothing but the distant tinkle of the goat bells.
When he reached the farm, he found it in a tumult. The little boys
had frightened Hazel out of her wits, and confirmed her worst fears
by the news that "Master Ranulph had run away towards the hills,
and that Master Hempen had run after him."
"Granny!" cried Hazel, wringing her hands, "a messenger must be
sent off post-haste to the Seneschal!"
"Stuff and nonsense!" cried the widow, angrily. "You mind your own
business, miss! Long before any messenger could reach Lud, the
lads will be back safe and sound. Towards the hills, indeed! That
Luke Hempen is a regular old woman. It's just a bit of Master
Ranulph's fun. He's hiding behind a tree, and will jump out on them
with a 'Boo!' Never in my life have I heard so much fuss about
nothing." And then, turning to the farm-servants, who were clustering
round the children with scared, excited eyes, she bade them go
about their business, and let her hear no more nonsense.
Her words sounded like good sense, but, for all that, they did not
convince Hazel. Her deep distrust of the widow was almost as old as
herself, and her instinct had told her for some time that the widow
was hostile to Ranulph.
Never for a moment did Hazel forget that she, not the widow, was
the rightful owner of the farm. Should she for once assert her
position, and, in direct defiance of the widow, report what had
happened to the law-man of the district and send a messenger to
Master Nathaniel?
But, as everybody knows, legal rights can be but weaklings—puny
little child princes, cowed by their bastard uncles, Precedent and
Seniority.
No, she must wait till she was of age, or married, or ... was there any
change of condition that could alter her relations with the widow, and
destroy the parasite growth of sullen docility which, for as long as
she could remember, had rotted her volition and warped her actions?
Hazel clenched her fists and set her teeth ... she would assert
herself!—she would!... now, at once? Why not give them, say, till
noon, to come back? Yes, she would give them till noon.
But before then, a rather shame-faced Luke arrived with his
confession that Master Ranulph had made proper fools of them.
"So, Miss Hazel, if you'll give me a bite of something, and lend me a
horse, I'll go after the young scamp to Moongrass. To think of his
giving us the slip like that and never having told me he'd heard from
his father! And there was me expecting a letter from his Worship
every day, telling us to leave at once, and...."
Hazel raised her eyebrows. "You were expecting a letter ordering
you to leave us? How was that?"
Luke turned red, and mumbled something inaudible. Hazel stared at
him for a few seconds in silence, and then she said quietly, "I'm
afraid you were wise if you asked the Seneschal to remove Master
Ranulph."
He gave her a shrewd glance. "Yes ... I fear this is no place for
Master Ranulph. But if you'd excuse me for being so bold, miss, I'd
like to give you a word of warning—don't you trust that Endymion
Leer further than you can see him, and don't you ever let your
Granny take you out fishing!"
"Thank you, Master Hempen, but I am quite able to look after
myself," said Hazel haughtily. And then an anxious look came into
her eyes. "I hope—oh! I hope that you'll find Master Ranulph safe
and sound at Moongrass! It's all so ... well, so very strange. That old
goatherd, who do you suppose he was? One meets strange people
near the Elfin Marches. You'll let me know if all is well ... won't you?"
Luke promised. Hazel's words had dampened his spirits and brought
back all his anxiety, and the fifteen miles to Moongrass, in spite of a
good horse, seemed interminable.
Alas! there was no Ranulph at the Jellygreens' farm; but, to Luke's
bewilderment, it turned out that the farmer had been expecting him,
as he had, a few days previously, received a letter from Master
Nathaniel, from which it was clear that he imagined his son was
already at Moongrass. So there was nothing for Luke but, with a
heavy heart, to start off the next morning for Lud, where, as we have
seen, he arrived a few hours after Master Nathaniel had left it.
 CHAPTER XXII
WHO IS PORTUNUS?
About half-way to Swan, Master Nathaniel, having tethered his horse
to a tree, was reclining drowsily under the shade of another. It was
midday, and the further west he rode the warmer it grew; it was
rather as if he were riding backward through the months.
Suddenly he was aroused by a dry little laugh, and looking round, he
saw crouching beside him, an odd-looking old man, with very bright
eyes.
"By my Great-aunt's rump, and who may you be?" enquired Master
Nathaniel testily.
The old man shut his eyes, gulped several times, and replied:

"Who are you? Who is me?

Answer my riddle and come and see,"

and then he stamped impatiently, as if that had not been what he

had wished to say.
"Some cracked old rustic, I suppose," thought Master Nathaniel, and
closed his eyes; in the hopes that when the old fellow saw he was
not inclined for conversation he would go away.
But the unwelcome visitor continued to crouch beside him, now and
then giving him little jogs in the elbow, which was very irritating when
one happened to be hot and tired and longing for forty winks.
"What are you doing?" cried Master Nathaniel irritably.

"I milk blue ewes; I reap red flowers,

I weave the story of dead hours,"
answered the old man.
"Oh, do you? Well, I wish you'd go now, this moment, and milk your
red ewes ... I want to go to sleep," and he pulled his hat further down
over his eyes and pretended to snore.
But suddenly he sprang to his feet with a yap of pain. The old man
had prodded him in his belly, and was standing looking at him out of
his startlingly bright eyes, with his head slightly on one side.
"Don't you try that on, old fellow!" cried Master Nathaniel angrily.
"You're a nuisance, that's what you are. Why can't you leave me
alone?"
The old man pointed eagerly at the tree, making little inarticulate
sounds; it was as if a squirrel or a bird had been charged with some
message that they could not deliver.
Then he crept up to him, put his mouth to his ear, and whispered,
"What is it that's a tree, and yet not a tree, a man and yet not a man,
who is dumb and yet can tell secrets, who has no arms and yet can
strike?"
Then he stepped back a few paces as if he wished to observe the
impression his words had produced, and stood rubbing his hands
and cackling gleefully.
"I suppose I must humour him," thought Master Nathaniel; so he said
good-naturedly, "Well, and what's the answer to your riddle, eh?"
But the old man seemed to have lost the power of articulate speech,
and could only reiterate eagerly, "Dig ... dig ... dig."
"'Dig, dig, dig.' ... so that's the answer, is it? Well, I'm afraid I can't
stay here the whole afternoon trying to guess your riddles. If you've
got anything to tell me, can't you say it any plainer?"
Suddenly he remembered the old superstition that when the Silent
People returned to Dorimare they could only speak in riddles and
snatches of rhyme. He looked at the old man searchingly. "Who are
you?" he said.
But the answer was the same as before. "Dig ... dig ... dig."
"Try again. Perhaps after a bit the words will come more easily," said
Master Nathaniel. "You are trying to tell me your name."
The old man shut his eyes tight, took a long breath, and, evidently
making a tremendous effort, brought out very slowly, "Seize—your—
op-por-tun-us. Dig ... dig. Por-tun-us is my name."
"Well, you've got it out at last. So your name is Portunus, is it?"
But the old man stamped his foot impatiently. "Hand! hand!" he cried.
"Is it that you want to shake hands with me, old fellow?" asked
Master Nathaniel.
But the old man shook his head peevishly. "Farm hand," he
managed to bring out. "Dig ... dig."
And then he lapsed into doggerel:

"Dig and delve, delve and dig,

Harness the mare to the farmer's gig."

Finally Master Nathaniel gave up trying to get any sense out of him
and untethered his horse. But when he tried to mount, the old man
seized the stirrup and looking up at him imploringly, repeated, "Dig ...
dig ... dig." And Master Nathaniel was obliged to shake him off with
some roughness. And even after he had left him out of sight he could
hear his voice in the distance, shouting, "Dig ... dig."
"I wonder what the old fellow was trying to tell me," said Master
Nathaniel to himself.
On the morning of the following day he arrived at the village of
Swan-on-the-Dapple.
Here the drama of autumn had only just reached its gorgeous
climax, and the yellow and scarlet trees were flaming out their silent
stationary action against the changeless chorus of pines, dark green
against the distant hills.
"By the Golden Apples of the West!" muttered Master Nathaniel, "I'd
no idea those accursed hills were so near. I'm glad Ranulph's safe
away."
Having inquired his way to the Gibbertys' farm, he struck off the high
road into the valley—and very lovely it was looking in its autumn
colouring. The vintage was over, and the vines were now golden and
red. Some of the narrow oblong leaves of the wild cherry had kept
their bottle-green, while others, growing on the same twig, had
turned to salmon-pink, and the mulberries alternated between
canary-yellow and grass-green. The mountain ash had turned a fiery
rose (more lovely, even, than had been its scarlet berries) and often
an olive grew beside it, as if ready, lovingly, to quench its fire in its
own tender grey. The birches twinkled and quivered, as if each
branch were a golden divining rod trembling to secret water; and the
path was strewn with olives, looking like black oblong dung. It was
one of those mysterious autumn days that are intensely bright
though the sun is hidden; and when one looked at these lambent
trees one could almost fancy them the source of the light flooding the
valley.
From time to time a tiny yellow butterfly would flit past, like a little
yellow leaf shed by one of the birches; and now and then one of the
bleeding, tortured looking liege-oaks would drop an acorn, with a
little flop—just to remind you, as it were, that it was leading its own
serene, vegetable life, oblivious to the agony ascribed to it by the
fevered fancy of man.
Not a soul did Master Nathaniel pass after he had left the village,
though from time to time he saw in the distance labourers following
the plough through the vineyards, and their smocks provided the
touch of blue that turns a picture into a story; there was blue smoke,
too, to tell of human habitations; and an occasional cock strutting up
and down in front of one of the red vines, like a salesman before his
wares, flaunting, by way of advertisement, a crest of the same
material as the vine leaves, but of a more brilliant hue; and in the
distance were rushes, stuck up in sheaves to dry, and glimmering
with the faint, whitish, pinky-grey of far-away fruit trees in blossom.
While, as if the eye had not enough to feed on in her own domain,
the sounds, even, of the valley were pictorial—a tinkling of distant
bells, conjuring up herds of goats; the ominous, melancholy roar
which tells that somewhere a waggoner is goading on his oxen; and
the distant bark of dogs that paints a picture of homesteads and
sunny porches.
As Master Nathaniel jogged leisurely along, his thoughts turned to
the farmer Gibberty, who many a time must have jogged along this
path, in just such a way, and seen and heard the very same things
that he was seeing and hearing now.
Yes, the farmer Gibberty had once been a real living man, like
himself. And so had millions of others, whose names he had never
heard. And one day he himself would be a prisoner, confined
between the walls of other people's memory. And then he would
cease even to be that, and become nothing but a few words cut in
stone. What would these words be, he wondered.
A sudden longing seized him to hold Ranulph again in his arms. How
pleasant would have been the thought that he was waiting to receive
him at the farm!
But he must be nearing his journey's end, for in the distance he
could discern the figure of a woman, leisurely scrubbing her washing
on one of the sides of a stone trough.
"I wonder if that's the widow," thought Master Nathaniel. And a slight
shiver went down his spine.
But as he came nearer the washerwoman proved to be quite a
young girl.
He decided she must be the granddaughter, Hazel; and so she was.
He drew up his horse beside her and asked if this were the widow
Gibberty's farm.
"Yes, sir," she answered shortly, with that half-frightened, half-defiant
look that was so characteristic of her.
"Why, then, I've not been misdirected. But though they told me I'd
find a thriving farm and a fine herd of cows, the fools forgot to
mention that the farmer was a rose in petticoats," and he winked
jovially.
Now this was not Master Nathaniel's ordinary manner with young
ladies, which, as a matter of fact, was remarkably free from flirtatious
facetiousness. But he had invented a role to play at the farm, and
was already beginning to identify himself with it.
As it turned out, this opening compliment was a stroke of luck. For
Hazel bitterly resented that she was not recognized as the lawful
owner of the farm, and Master Nathaniel's greeting of her as the
farmer thawed her coldness into dimples.
"If you've come to see over the farm, I'm sure we'll be very pleased
to show you everything," she said graciously.
"Thank'ee, thank'ee kindly. I'm a cheesemonger from Lud-in-the-
Mist. And there's no going to sleep quietly behind one's counter
these days in trade, if one's to keep one's head above the water. It's
competition, missy, competition that keeps old fellows like me
awake. Why, I can remember when there weren't more than six
cheesemongers in the whole of Lud; and now there are as many in
my street alone. So I thought I'd come myself and have a look round
and see where I could get the best dairy produce. There's nothing
like seeing for oneself."
And here he launched into an elaborate and gratuitous account of all
the other farms he had visited on his tour of inspection. But the one
that had pleased him best, he said, had been that of a very old friend
of his—and he named the farmer near Moongrass with whom,
presumably, Ranulph and Luke were now staying.
Here Hazel looked up eagerly, and, in rather an unsteady voice,
asked if he'd seen two lads there—a big one, and a little one who
was the son of the Seneschal.
"Do you mean little Master Ranulph Chanticleer and Luke Hempen?
Why, of course I saw them! It was they who told me to come along
here ... and very grateful I am to them, for I have found something
well worth looking at."
A look of indescribable relief flitted over Hazel's face.
"Oh ... oh! I'm so glad you saw them," she faltered.
"Aha! My friend Luke has evidently been making good use of his
time—the young dog!" thought Master Nathaniel; and he proceeded
to retail a great many imaginary sayings and doings of Luke at his
new abode.
Hazel was soon quite at home with the jovial, facetious old
cheesemonger. She always preferred elderly men to young ones,
and was soon chatting away with the abandon sometimes
observable when naturally confiding people, whom circumstances
have made suspicious, find someone whom they think they can trust;
and Master Nathaniel was, of course, drinking in every word and
longing to be in her shoes.
"But, missy, it seems all work and no play!" he cried at last. "Do you
get no frolics and junketings?"
"Sometimes we dance of an evening, when old Portunus is here,"
she answered.
"Portunus?" he cried sharply, "Who's he?"
But this question froze her back into reserve. "An old weaver with a
fiddle," she answered stiffly.
"A bit doited?"
Her only answer was to look at him suspiciously and say, "Do you
know Portunus, sir?"
"Well, I believe I met him—about half-way between here and Lud.
The old fellow seemed to have something on his mind, but couldn't
get it out—I've known many a parrot that talked better than he."
"Oh, I've often thought that, too! That he'd something on his mind, I
mean," cried Hazel on another wave of confidence. "It's as if he were
trying hard to tell one something. And he often follows me as if he
wanted me to do something for him. And I sometimes think I should
try and help him and not be so harsh with him—but he just gives me
the creeps, and I can't help it."
"He gives you the creeps, does he?"
"That he does!" she cried with a little shiver. "To see him gorging
himself with green fruit! It isn't like a human being the way he does it
—it's like an insect or a bird. And he's like a cat, too, in the way he
always follows about the folk that don't like him. Oh, he's nasty! And
he's spiteful, too, and mischievous. But perhaps that's not to be
wondered at, if ..." and she broke off abruptly.
Master Nathaniel gave her a keen look. "If what?" he said.
"Oh, well—just silly talk of the country people," said Hazel evasively.
"That he's—er, for instance, one of what you call the Silent People?"
"How did you know?" And Hazel looked at him suspiciously.
"Oh, I guessed. You see, I've heard a lot of that sort of talk since I've
been in the west. Well, the old fellow certainly seemed to have
something he wanted to tell me, but I can't say he was very explicit.
He kept saying, over and over again, 'Dig, dig.'"
"Oh, that's his great word," cried Hazel. "The old women round about
say that he's trying to tell one his name. You see, they think that ...
well, that he's a dead man come back and that when he was on
earth he was a labourer, by name Diggory Carp."
"Diggory Carp?" cried Master Nathaniel sharply.
Hazel looked at him in surprise. "Did you know him, sir?" she asked.
"No, no; not exactly. But I seem to have heard the name somewhere.
Though I dare say in these parts it's a common enough one. Well,
and what do they say about this Diggory Carp?"
Hazel looked a little uneasy. "They don't say much, sir—to me. I
sometimes think there must have been some mystery about him. But
I know that he was a merry, kind sort of man, well liked all round, and
a rare fiddler. But he came to a sad end, though I never heard what
happened exactly. And they say," and here she lowered her voice
mysteriously, "that once a man joins the Silent People he becomes
mischievous and spiteful, however good-natured he may have been
when he was alive. And if he'd been unfairly treated, as they say he
was, it would make him all the more spiteful, I should think. I often
think he's got something he wants to tell us, and I sometimes wonder
if it's got anything to do with the old stone herm in our orchard ... he's
so fond of dancing round it."
"Really? And where is this old herm? I want to see all the sights of
the country, you know; get my money's worth of travel!" And Master
Nathaniel donned again the character of the cheerful cheesemonger,
which, in the excitement of the last few minutes, he had, unwittingly,
sloughed.
As they walked to the orchard, which was some distance from the
washing trough, Hazel said, nervously:
"Perhaps you hadn't heard, sir, but I live here with my granny; at
least, she isn't my real granny, though I call her so. And ... and ...
well, she seems fond of old Portunus, and perhaps it would be as
well not to mention to her that you had met him."
"Very well; I won't mention him to her ... at present." And he gave her
rather a grim little smile.
Though the orchard had been stripped of its fruit, what with the red
and yellow leaves, and the marvelous ruby-red of the lateral
branches of the peach trees there was colour enough in the
background of the old grey herm, and, in addition, there twisted
around him the scarlet and gold of a vine.
"I often think he's the spirit of the farm," said Hazel shyly, looking to
see if Master Nathaniel was admiring her old stone friend. To her
amazement, however, as soon as his eyes fell on it he clapped his
hand against his thigh, and burst out laughing.
"By the Sun, Moon and Stars!" he cried, "here's the answer to
Portunus's riddle: 'the tree yet not a tree, the man yet not a man,'"
and he repeated to Hazel the one consecutive sentence that
Portunus had managed to enunciate.
"'Who has no arms and yet can strike, who is dumb and yet can tell
secrets,'" she repeated after him. "Can you strike and tell secrets, old
friend?" she asked whimsically, stroking the grey lichened stone. And
then she blushed and laughed as if to apologize for this exhibition of
childishness.
With country hospitality Hazel presumed that their uninvited guest
had come to spend several days at the farm, and accordingly she
had his horse taken to the stables and ordered the best room to be
prepared for his use.
The widow, too, gave him a hearty welcome, when he came down to
the midday meal in the big kitchen.
When they had been a few minutes at table, Hazel said, "Oh, granny,
this gentleman has just come from the farm near Moongrass, where
little Master Chanticleer and young Hempen have gone. And he says
they were both of them blooming, and sent us kind messages."
"Yes," said Master Nathaniel cheerfully, ever ready to start
romancing, "my old friend the farmer is delighted with them. The talk
in Lud was that little Chanticleer had been ill, but all I can say is, you
must have done wonders for him—his face is as round and plump as
a Moongrass cheese."
"Well, I'm glad you're pleased with the young gentleman's looks, sir,"
said the widow in a gratified voice. But in her eyes there was the
gleam of a rather disquieting smile.
Dinner over, the widow and Hazel had to go and attend to their
various occupations, and Master Nathaniel went and paced up and
down in front of the old house, thinking. Over and over again his
thoughts returned to the odd old man, Portunus.
Was it possible that he had really once been Diggory Carp, and that
he had returned to his old haunts to try and give a message?
It was characteristic of Master Nathaniel that the metaphysical
possibilities of the situation occupied him before the practical ones. If
Portunus were, indeed, Diggory Carp, then these stubble-fields and
vineyards, these red and golden trees, would be robbed of their
peace and stability. For he realized at last that the spiritual balm he
had always found in silent things was simply the assurance that the
passions and agonies of man were without meaning, roots, or
duration—no more part of the permanent background of the world
than the curls of blue smoke that from time to time were wafted
through the valley from the autumn bonfires of weeds and rubbish,
and that he could see winding like blue wraiths in and out of the
foliage of the trees.
Yes, their message, though he had never till now heard it distinctly,
had always been that Fairyland was nothing but delusion—there was
life and death, and that was all. And yet, had their message always
comforted him? There had been times when he had shuddered in
the company of the silent things.
"Aye, aye," he murmured dreamily to himself, and then he sighed.
But he had yielded long enough to vain speculations—there were
things to be done. Whether Portunus were the ghost of Diggory Carp
or merely a doited old weaver, he evidently knew something that he
wanted to communicate—and it was connected with the orchard
herm. Of course, it might have nothing whatever to do with the
murder of the late farmer Gibberty, but with the memory of the
embroidered slipper fresh in his mind, Master Nathaniel felt it would
be rank folly to neglect a possible clue.
He went over in his mind all the old man's words. "Dig, dig," ... that
word had been the ever recurring burden.
Then he had a sudden flash of inspiration—why should not the word
be taken in its primary meaning? Why, instead of the first syllable of
Diggory Carp, should it not be merely and order to dig ... with a
spade or a shovel? In that case it was clear that the place to dig in
was under the herm. And he decided that he would do so as soon as
an opportunity presented itself.
 CHAPTER XXIII
THE NORTHERN FIRE-BOX AND DEAD MEN'S
TALES
That night Hazel could not get to sleep. Perhaps this was due to
having noticed something that afternoon that made her vaguely
uneasy. The evenings were beginning to be chilly, and, shortly
before supper, she had gone up to Master Nathaniel's room to light
his fire. She found the widow and one of the maidservants there
before her, and, to her surprise, they had brought down from the attic
an old charcoal stove that had lain there unused for years, for
Dorimare was a land of open fires, and stoves were practically
unknown. The widow had brought the stove to the farm on her
marriage, for, on her mother's side, she had belonged to a race from
the far North.
On Hazel's look of surprise, she had said casually, "The logs are
dampish today, and I thought this would make our guest cozier."
Now Hazel knew that the wood was not in the least damp; how could
it be, as it had not rained for days? But that this should have made
her uneasy was a sign of her deep instinctive distrust of her
grandfather's widow.
Perhaps the strongest instinct in Hazel was that of hospitality—that
all should be well, physically and morally, with the guests under the
roof that she never forgot was hers, was a need in her much more
pressing than any welfare of her own.
Meanwhile, Master Nathaniel, somewhat puzzled by the outlandish
apparatus that was warming his room, had got into bed. He did not
immediately put out his candle; he wished to think. For being much
given to reverie, when he wanted to follow the sterner path of
consecutive thought, he liked to have some tangible object on which
to focus his eye, a visible goal, as it were, to keep his feet from
straying down the shadowy paths that he so much preferred.
Tonight it was the fine embossed ceiling on which he fixed his eye—
the same ceiling at which Ranulph used to gaze when he had slept
in this room. On a ground of a rich claret colour patterned with azure
arabesques, knobs of a dull gold were embossed, and at the four
corners clustered bunches of grapes and scarlet berries in stucco.
And though time had dulled their colour and robbed the clusters of
many of their berries, they remained, nevertheless, pretty and
realistic objects.
But, in spite of the light, the focus, and his desire for hard thinking,
Master Nathaniel found his thoughts drifting down the most fantastic
paths. And, besides, he was so drowsy and his limbs felt so
strangely heavy. The colours on the ceiling were getting all blurred,
and the old knobs were detaching themselves from their background
and shining in space like suns, moons, and stars—or was it like
apples—the golden apples of the West? And now the claret-coloured
background was turning into a red field—a field of red flowers, from
which leered Portunus, and among which wept Ranulph. But the
straight road, which for the last few months had been the projection
of his unknown, buried purpose, even through this confused
landscape glimmered white ... yet, it looked different from usual ...
why, of course, it was the Milky Way! And then he knew no more.
In the meantime Hazel had been growing more and more restless,
and, though she scolded herself for foolishness, more and more
anxious. Finally, she could stand it no more: "I think I'll just creep up
to the gentleman's door and listen if I can hear him snoring," she
said to herself. Hazel believed that it was a masculine peculiarity not
to be able to sleep without snoring.
But though she kept her ear to the keyhole for a full two minutes, not
a sound proceeded from Master Nathaniel's room. Then she softly
opened the door. A lighted candle was guttering to its end, and her
guest was lying, to all appearance, dead, whilst a suffocating
atmosphere pervaded the room. Hazel felt almost sick with terror, but
she flung open the casement window as wide as it would go, poured