Professional Documents
Culture Documents
Audit of Property, Plant, and Equipment - Hahu Zone - 1622367787308
Audit of Property, Plant, and Equipment - Hahu Zone - 1622367787308
com/accounting)
Marketing (https://hahuzone.com/marketing)
Management (https://hahuzone.com/management)
Economics (https://hahuzone.com/economics)
Search
Home (/) / Auditing Principle and Practice 2 (/auditing-principle-and-practice-2) / Audit of Property, Plant, and Equipment
The term property, plant and equipment (fixed assets) include all tangible assets with a service life of more than one year that are used
in the operation of the business and are not acquired for the purpose of resale. Three major subgroups of such assets are generally
recognized.
1. Land, such as property used in the operation of the business, has the significant characteristics of not being subject to depreciation.
2. Building machinery, equipment and land improvements, such as fences and parking lots, have limited service lives and are subject
to depreciation.
3. Natural resources (wasting assets), such as oil wells, coal mines, and tracts of timber, are subject to depletion as the natural
resources are extracted or removed.
Fixed asset constitute a significant proportion of the total assets of many organizations particularly those engaged in manufacturing
activities. Audit of fixed asset is, therefore generally considered to be an important part of an independent financial audit. Though the
number of transactions involving fixed assets is smaller in number, the amount involved in these transactions will be very high. Hence
the auditor has to give more attention while auditing the transactions relating to fixed asset.
In conjunction with the audit of property, plant, and equipment, the auditors also obtain evidence about the related accounts of
depreciation expenses, accumulated depreciation, and repair and maintenance expenses.
The auditor studies and evaluates the accounting system and the effectiveness of internal control relating to fixed assets. The auditor’s
study and evaluation of internal control relating to fixed assets covers the following aspects:
1. Segregation and rotation of duties: The auditor has to see whether there is proper segregation of various duties relating to fixed
assets such as
The auditor also has to see whether the duties of various persons relating to fixed assets are rotated periodically or not.
a. The auditor has to check the internal control relating to capital budgeting. i.e., whether the proposal for capital expenditure has
been received in time in the proper format, approved by the top management and whether it is properly communicated to the
various departments after the approval.
b. Whether a written authorization from a senior level of the management is included in the budget.
c. Whether the organization have laid down proper procedures for acquisition of fixed assets i.e. for inviting quotations, selection of
suppliers, approval of prices, payment terms, safeguard for timely delivery etc.
d. Whether the purchases are made on the basis of competitive bids. And whether there is requirement for documenting the reasons
for making purchases other than at lowest price.
e. Whether the control over receipt of fixed assets are effective ie., whether the technical specifications of the assets received are
verified with the purchase orders before accepting and if rejected whether the debit notes are raised promptly.
f. Whether periodic comparisons of the actual expenditures of the fixed assets are compared with the capital expenditure budget and
whether approval from the competent authority is received if there is a deviation form the budget.
g. Whether there any system of getting prior approval from the competent authority in case of transfer of fixed assets from one
department to another?
h. Whether adequate controls exist for disposal of fixed assets i.e. with proper authorization, invitation of quotations, approval of
prices, proper documentation etc
a. The auditor has to check whether the company maintains proper records of fixed assets including those items, which are fully
depreciated.
b. Whether the organization maintains the record of assets given on lease or used by the organization but owned by others.
c. Whether a register containing title deeds of the assets are maintained properly.
d. Whether the title deeds or registration documents are kept in safe custody and verified periodically.
e. Whether the organization maintained a detail record of projects which are in progress.
f. Whether the expenditures incurred are properly allocated between capital and revenue.
5. Independent checks:
The auditor has to see whether there is any internal audit for fixed assets and determining the coverage and effectiveness of the internal
audit. The auditor has to examine the scope of the work of the internal auditors and their reports.
The auditor determines the nature timing and extent of substantive procedures relating to fixed assets after evaluating the effectiveness
of internal controls. The procedures normally followed are the following
1. Verify the opening balances from the previous years financial statements or ledger accounts.
2. Verify the additions made during the year from the approval of appropriate authority copies of purchase orders, invoices receiving
reports, acknowledgement form the supplier and bank statement.
3. Verify the assets constructed during the year by examining work order records, statement of allocation and apportionments of
costs, certificate of work performed, contractors bills, invoices of suppliers of materials, bank statement etc.
4. Verify the major repairs and maintenance to ensure no revenue expenditure related to the capital assets is included.
5. Verify the disposal or retirement of fixed assets by examining the approval of appropriate authority, quotations invited from
buyers, contract with the buyer, copy of the sale bills, evidence of physical deliveries etc.
6. Examine whether the book values and accumulated depreciation of the fixed assets disposed or discarded are properly adjusted
accounting the resulting gains or losses properly.
7. Verify the minutes of the board of directors, agreements, and correspondence with lawyers to identify any charges or
encumbrances on the fixed assets.
8. Verify the arithmetical accuracy of the fixed asset records.
9. Verify whether the value shown in the financial statement is after charging adequate depreciation.
10. Examine the evidence of ownership of fixed assets.
Though the physical verification is the duty of the management, the auditor can review or observe the verification by examining the
documents relating to the physical verification.
1. Examine whether the fixed assets have been valued according to the generally accepted accounting principles.
2. Examine whether adequate depreciation have been provided.
3. Examine whether the fixed assets have been revalued in a systematic/ scientific/ appraisal basis considering the future life and the
possibility of obsolescence.
4. Examine the basis on which the consideration has been approportionated to various assets when several assets have been
purchased for a consolidated price.
5. Examine the relevant documents such as title deeds agreements etc in order to ascertain the extent of the shares of the
organization when the organization owns assets jointly with others.
(D). Analytical Procedures: -The analytical procedures employed by the auditors in the audit of fixed assets are the following:
1. Compare the additions or disposals of fixed assets made during the year with the budgeted figures.
2. Compare the ratio of depreciation for the current year to the average book value of the fixed assets with the corresponding figures
of the previous year.
3. Compare the amount of repairs and maintenance of the current year with the figures of the previous year.
4. Compare the ratio of actual capacity utilization with the installed capacity of the current year with the figures of the previous year.
The auditor has to obtain an appropriate representation form the management concerning the fixed assets stating that the fixed assets
shown in the balance sheet are arrived at after considering all capital expenditures on additions, eliminating the cost and accumulated
depreciation relating to the items discarded, destroyed and disposed off and adequate depreciation has been provided for during the
current year.
The following procedures are typical of the work required in many engagements for the verification of property, plant and equipments.
Auditors may use written description, flow chart or internal control questionnaire to describe the nature of client’s internal control
structure. After preparing description of internal control, the auditors will determine whether the controls as described to them have
been placed in operation, whether there is appropriate segregation of duties and considered the misstatements that may occur.
2. Assess control risk and design additional tests of control for the assertions about property, plant, and equipment.
Based on an understanding of the client’s internal control over property, plant and equipment, the auditors develop their planned
assessed level of control risk for the various financial statement assertion assertions and obtain additional evidences of the operating
effectiveness of the client’s controls by designating additional tests of control.
3. Perform additional tests of controls for those controls that the auditors plant to consider to support their planned assessed levels of
control risk.
As auditors obtain an understanding of the client’s internal control; certain tests of control are performed.
E.g. select a sample of purchase of plant and equipment to test the control related to authorization, receipts and proper recording of the
transactions.
4. Reassess control risk for each of the major financial statements assertions about property, plant, and equipments based on the results of
tests of controls and, if necessary, modify substantive tests.
The final step in the auditor’s consideration of internal control involves a reassessment of control risk based on the results of the tests of
control. On the basis of the reassessed level of control risk auditor modify their planned program of substantive testing procedures for
property, plant, and equipment assertions.
B) Perform substantive tests of property, plant and equipments and related depreciation transactions and balances
The objective of major substantive testing procedures of property, plant and equipment balances are given in the following
table.
Primary audit
Subjective Test objective to be
addressed
5. Obtain a summary analysis of changes in
property owned and reconcile to ledgers -The
summary analysis shows the beginning balances
of property, plant, and equipment, additions to Clerical
and/or retirement from property, plant, and accuracy
equipments and ending balances of property plant
and equipments. Auditors reconcile subsidiary
ledgers with the Controlling accounts
6. Vouch additions to property, plant and
equipment during year – The vouching process
utilizes a working paper analysis of the general
ledger controlling accounts and includes the
tracing of entries through the journal to original
documents such as contracts, construction work
orders, invoices canceled checks authorization by
appropriate
individuals
Existence and
7. Make physical inspection of major right
acquisitions
valuation or
The auditors usually make a physical allocation
inspection of major units of plant and
equipment acquired during the year under
audit by comparing the physical assets with
underlying records.
Helps to maintain good working knowledge
of the Client’s operations and also in
interpreting the accounting entries for both
additions and retirements.
12. Investigate retirement of property, plant and
equipment during the year
15. Examine lease agreements on property, plant
and equipments i.e. lease to and/ or form other
party. The auditors should carefully examine lease
agreements to determine whether the accounting
for assets involved in proper (in accordance with
the requirements of GAAP)
Depreciation is the decrease in the value of the asset due to wear and tear, obsolescence, lapse of time etc. Fixed assets are to be
disclosed in the balance sheet at their cost or at the revalued amount less depreciation
Determining the annual depreciation expense involves two rather arbitrary decisions by the client company: first, an estimate of the
useful economic lives of various groups of assets, and second, a choice among several depreciation methods, each of which would lead
to a different answers. The wide range of possible amounts for annual depreciation expense because of these decisions by the client
suggests that the auditors should maintain a perspective of looking for assurance of overall reasonableness. Specifically, overall tests of
the year/s depreciation expense are of special importance.
Accordingly, the auditor has to examine whether adequate depreciation has been provided in the books in respect of all depreciable
assets according to the provisions of the relevant statutes.
While auditing depreciation, the auditor has to examine the following points in respect of depreciation
1. Whether adequate depreciation has been provided during the current year.
2. Whether the depreciation has been calculated by appropriate methods.
3. Whether appropriate method has been selected after considering the useful life of the asset and salvage value.
4. Whether the method of calculating depreciation has been consistent over the years.
5. Whether any change in the method has been properly disclosed in the financial statements.
6. Whether accumulated depreciation in respect of discarded or disposed assets have been adjusted in the accumulated depreciation
amount.
7. Whether depreciation has been provided properly on the assets added or disposed of during the current year.
8. Whether depreciation has been provided on revalued assets
9. Whether the depreciation has been properly disclosed in the financial statements.
When evaluating the reasonableness of depreciation (with accounting estimate), auditors use one or more of the following three basic
approaches.
2). Review subsequent events or transactions that might have bearing on the estimate to management’s estimate
The following outlines of substantive tests to be performed by the auditors in reviewing depreciation are stated in sufficient detail to be
largely self-explanatory.
1. Review the depreciation policies set forth in company manuals or other management directives. Determine whether the methods in
use are designed to allocate costs of plant and equipment assets systematically over their service lives.
a. Inquire whether any extra working shifts or other conditions of accelerated production are present that might warrant adjustment
of normal depreciation rates.
b. Discuss with executives the possible need for recognition of obsolescence resulting from technology or economic developments.
2. Obtain or prepare a summary analysis of accumulated depreciation for the major property classification as shown by general ledger
accounts, listing beginning balances, provisions for depreciation during the year, retirements, and ending balances.
a. Compare beginning balances with the audited amounts in last year/s working papers.
b. Determine that the totals accumulated depreciation recorded in the plant and equipment subsidiary records agree with the
applicable general ledger controlling accounts.
b) Test computations of depreciations for provisions for a representatives number of units and trace to individuals records in the
property ledger. Be alert for excessive depreciation on fully depreciated assets.
c) Compare credits to accumulated depreciation accounts the year’s depreciation provisions with debits entries in related depreciation
expenses accounts.
a) Trace deductions to the working paper analyzing retirements of assets during the year.
a) Compute the ratio of depreciation expenses to total cost of plant and compare with prior years.
b) Compare the percentage relationships between accumulated depreciation and related property accounts with that prevailing in
prior years. Discuss significant variations from normal depreciation program with appropriate members of managements.
Click to Download:
Auditing 2 - Chapter Four.docx (https://hahuzone.com/sites/default/files/Auditing%202%20-%20Chapter%20Four.docx)
(https://www.addtoany.com/share#url=https%3A%2F%2F1.800.gay%3A443%2Fhttps%2Fhahuzone.co
property-plant-and-
equipment&title=Audit%20of%20Property%2C%20Plant%2C%20and%
‹ Audit of Inventories and Cost of Goods Sold (/audit-inventories-and-cost-goods-sold) Outline
up (/auditing-principle-and-practice-2)
Audit of Purchase, Accounts Payable and Other Liabilities › (/audit-purchase-accounts-payable-and-other-liabilities)
Tags: Accounting (/accounting)
Related Content
Accounting for Corporations