ICAB & ICAEW: 225) : Worked Example: Non-Current Asset Assurance Engagement

Worked example: Non-current asset assurance engagement (Assurance, Study Manual,
ICAB & ICAEW: 225)
Peter is carrying out a non-current asset assurance engagement at Manufacturing Company

Limited (MCL). MCL owns the property from which it operates. It has a lot of fixed plant, which
it replaced three years ago, and owns several industrial vehicles for moving inventory between
locations at its premises. It also owns a number of cars, which its staff have as company cars, and
a great deal of office furniture, fittings and computers in the office complex attached to the
factory.
Peter is concerned with concluding that the non-current assets declared in the financial
statements are complete, exist, are owned by the company and are valued appropriately.
Completeness
Peter will:
 Obtain a schedule of non-current assets from the client
 Agree the figures per the schedule to the financial statements and accounting records
(nominal ledger)
 Compare the schedule to the asset register to ensure that the schedule reflects all the
assets owned by the company
 Select a number of assets physically present on site and ensure that they are contained in
the asset register
 Confirm the additions on the schedule are correct
Existence
Peter will:
 Select a sample of assets contained in the asset register and verify that they are physically
present on site
Rights and obligations

Peter will:
 Select a sample of assets in the asset register and vouch them to the registration
documents available for those assets (vehicles – registration documents (although these
indicate who is the ‘registered keeper’, who is not necessarily the owner), building – title
deeds, plant and fixtures – purchase invoice, ensuring that it is not a lease)
 Review sales invoices for sold assets to ensure that ownership has been transferred
Valuation
Peter will:
 Confirm the cost or valuation of a sample of assets to purchase invoices or valuation
certificates
 Confirm the brought forward depreciation levels of those assets (if relevant) to prior year
audit files or by reviewing the brought forward asset register files
 Confirm the annual depreciation in respect of those assets is appropriate (by reference to
the accounting policy on depreciation published in the financial statements), and correctly
calculated (by recalculation or by using analytical procedures)
 Review to ensure that depreciation has been correctly calculated on disposed assets, and
recalculate profit or loss on sale of those assets
Presentation and disclosure

 Peter will review the financial statements to ensure that the disclosure requirements
relating to noncurrent assets have been met
Other matters
 Peter is likely to focus asset testing on asset additions, as these will comprise a large
proportion of the cost of non-current assets as they will have been depreciated the least
 Peter will use sampling on some classes of assets and not others. For example, in this
instance, property is likely to be a material balance and therefore will be vouched 100%.
Other classes of assets are likely to be sampled as the overall total contains a large
number of assets.
Procedures to obtain evidence (Assurance, Study Manual, CA Professional Stage Knowledge

Level, Page: 189)
Assurance providers obtain evidence by one or more of the following procedures outlined in
BSA 500.
Procedures Explanation Strengths and

weaknesses
1. Inspection of Inspection (physical examination) of tangible Inspection of assets is a
tangible assets assets that are recorded in the accounting good procedure,
records confirms existence, but does not particularly in the case of
confirm rights and obligations or valuation. assets that the entity could
For example, machinery recorded in asset not function without (for
register can be inspected by assurance example its production
providers. Confirmation that assets seen are plant), but the weakness
recorded in accounting records gives evidence associated with inspection
of completeness. However, this is limited to is that assets not used in
assets assurance providers can see – if assets daily production could be
have been taken off site (hidden) they might hidden from the assurance
not be picked up. providers and not included
in financial statements.
2. Inspection of Inspection of documents involves examining The strength of this

documentation records or documents, for example, looking at procedure depends on what
a sales contract or a share certificate. is being inspected to give
evidence. For instance,
What inspection of documents achieves inspection of a purchase
depends on the nature of the document. For invoice gives better quality
example, looking at a share certificate gives evidence than inspection of
evidence of the existence of the investment. sales invoice, because a
purchase invoice is created
Looking at source documents (e.g.sales by a third party.
invoices) and tracing to financial statements
gives evidence of completeness (e.g.of
revenue).Inspection also provides evidence of
valuation(for example, a purchase invoice
gives evidence of the cost of inventory), rights
and obligations (for example, a hire purchase
agreement gives evidence in relation to
ownership of non-current assets) and the
nature of items (presentation and disclosure).
It can also be used to compare documents (and
hence test consistency of audit evidence) and
confirm authorisation.
3. Observation This involves watching a procedure being This procedure is relatively
performed (for example, post opening). weak, as it only confirms
that the procedure is being
performed correctly when
the assurance provider is
watching.
4. Inquiry This involves seeking information from client The strength or weakness
management or staff or external sources and of this procedure will
evaluating responses. depend on of whom the
inquiry is being made – a
member of client staff
could misrepresent matters
to the assurance provider if
they misunderstand the
nature of the question, or
they are seeking to conceal
an error or fraud.
5.Confirmation( This involves seeking confirmation from a This can be a very strong
a particular third party, e.g. confirmation from bank of procedure but there may be
form of inquiry) bank balances. instances where the third
party is motivated to
misrepresent, for example
an understated receivables
balance might be
confirmed because it
favoured the customer.
6. Recalculation Checking mathematical accuracy of client’s Recalculation is evidence
records, for example, adding up ledger created by the assurance
accounts. provider so is strong
evidence.
7.Reperformanc Independently executing procedures or Again, the fact that the
e controls, either manually or through the use of assurance provider carries
computer assisted audit techniques (covered out the performance of a
below). control himself makes it
strong evidence.
8. Analytical Evaluating and comparing financial and/or Evidence here is limited by
procedures non-financial data for plausible relationships the strength or weakness of
and investigating unexpected fluctuations. the underlying accounting
system. However, this can
be a strong procedure if
comparison is made to
items that do not rely on
the same accounting
system or that the
assurance provider can
corroborate outside the
accounting system.

ICAB & ICAEW: 225) : Worked Example: Non-Current Asset Assurance Engagement

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ICAB & ICAEW: 225) : Worked Example: Non-Current Asset Assurance Engagement

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Worked example: Non-current asset assurance engagement (Assurance, Study Manual,

ICAB & ICAEW: 225)

Peter is carrying out a non-current asset assurance engagement at Manufacturing Company

Rights and obligations

Presentation and disclosure

Procedures to obtain evidence (Assurance, Study Manual, CA Professional Stage Knowledge

Procedures Explanation Strengths and

2. Inspection of Inspection of documents involves examining The strength of this

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