AUD 589

AUDITING 1

Audit of Property, Plant and

Equipment

Prepared by:
Yusarina Mat Isa
UiTM Kampus Puncak Alam
 Learning Objectives
 Able to:
• Understand control objectives over PPE
• Identify the tests of controls procedures
• Understand assertions and audit objectives for
PPE
• Understand audit procedures for PPE and types of
substantive tests for auditing PPE

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DIFFERENCE IN AUDITING OF CURRENT
ASSETS AND NON-CURRENT ASSET
<> PPE:
• usually fewer current period
acquisitions
• amount in the SOFP often material
• likely to be kept and maintained
in the accounting records for
several years
• require professional judgement such
as for depreciation and amortization
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OVERVIEW OF PPE
• Property, plant, and equipment: Significant characteristics
<> have expected lives > 1 year distinguish from current
<> used in business assets
<> not acquired for resale

Part of the
• PPE register vs. PPE schedule
MASTER FILE
–PPE register - list of all PPE owned by an organization,
name, location, quantity, detailed description of the PPE,
date the PPE was purchased and the value of the PPE.
–PPE schedule - lead schedule contains the name of the
PPE, the opening balance, additions during the year,
disposal during the year,  depreciation rate, accumulated
depreciation charge, current depreciation charge, NBV. 
–Can be part of fixed asset master file.
–Not part of double entry system

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CONTROL OBJECTIVES OF PPE
• To ensure that controls are in place to ensure:
– PPE are adequately safeguarded and properly
maintained
– All acquisitions and disposals of PPE are properly
authorized
– All acquisitions and disposals of PPE are recorded at
the appropriate price
– All PPE are properly recorded, appropriately
depreciated, and written down where necessary
– PPE are properly classified and disclosed

These are just some of the examples…..

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 AUDIT TEST FOR PPE
NON CURRENT DIFF. WITH
OVERVIEW ASSET MASTER AUDIT OF
FILE CURRENT ASSET

Analytical procedures
Verifying current year acquisitions
Verifying current year disposals
TESTS IN
AUDIT OF PPE
Verifying the ending balance in
the asset account
Verifying depreciation expense
Verifying the ending balance in
accumulated depreciation

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ANALYTICAL PROCEDURES
• Depends on the nature of the client’s operations

• Assessing the likelihood of material misstatements in the depreciation

expense and accumulated depreciation accounts.

ANALYTICAL PROCEDURES
<>Compare depreciation expense with previous
years
gross manufacturing equipment cost
<>Compare accum. depreciation with previous
years
gross manufacturing equipment cost
<>Compare monthly/annually repairs and maintenance, supplies exp.,
small tools expense, and similar accounts with previous years
<>Compare gross manufacturing cost with previous years 7
VERIFYING CURRENT YEAR
ACQUISITION
• Importance:
– Long-term affect on F/S
– Failure to capitalize/improper recording of the
amount of the PPE affects:
B/S until company disposes PPE
I/S until PPE is fully depreciated
• Information needed, such as:
– Client’s capitalization policy
(how ‘immaterial’ transaction is treated)

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VERIFYING CURRENT YEAR
ACQUISITION
• The extent of verification depends on:
– Control risk of acquisitions
– Materiality of acquisitions

• Starting point
obtained schedule from the PPE master
file containing information (cost, date,
descriptions) on assets acquired during the
year
• Frame of reference
7 of 9 balance-related audit objectives

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 BALANCE-RELATED AUDIT TESTS OF DETAILS OF
OBJECTIVE BALANCES PROCEDURES
DETAIL TIE-IN <>Foot the acquisitions schedule
>current year acquisition in <>Trace the individual acquisitions
acquisition schedule to the master file for amounts
= related master file amount and descriptions
= amount in general ledger <>Trace total to the general ledger
EXISTENCE <>Examine vendors’ invoices and
>current year acquisitions do exist receiving reports
<>Physically examine assets
COMPLETENESS <>Examine vendors’ invoices of
>acquisitions are properly closely related accounts to
recorded uncover items that should be
manufacturing equipment
<>Review lease and rental
agreements

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 BALANCE-RELATED AUDIT TESTS OF DETAILS OF
OBJECTIVE BALANCES PROCEDURES
ACCURACY <>Examine vendors’ invoices
>current year acquisitions as
listed are accurate
CLASSIFICATION <>Examine vendors’ invoices
>acquisitions are properly in manufacturing account
classified, related with accuracy of closely related accounts
*repairs
<>Examine rent and lease
expense for capitalisable leases
CUTOFF <>Review transactions near the
>acquisitions are recorded in the B/S date for proper
proper period
RIGHTS <>Examine vendors’ invoices
>client has rights to acquisitions

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VERIFYING CURRENT YEAR DISPOSAL

Main objectives

existing disposal are disposal accurately

recorded recorded

• Search for unrecorded disposals is essential

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VERIFYING CURRENT YEAR
ACQUISITION
Examples of audit procedures:
• Review whether newly acquired assets replace the
existing
• Analyze gains/losses on disposal of assets and
miscellaneous income
• Review plant modifications and changes in pact line,
property taxes, or insurance coverage for indications of
deletions of equipment
• Make inquiries of management and production
personnel on possibility of the disposal of assets

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VERIFYING ENDING BALANCE OF PPE

• The auditor’s objectives when auditing manufacturing

equipment:
– All equipment owned is recorded
– All recorded equipment physically exist on the B/S date

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VERIFYING ENDING BALANCE OF PPE
OBJECTIVES TESTS
DETAIL TIE-IN <>Manufacturing equipment as listed in the master
file = general ledger
EXISTENCE <>Verifying the existence of individual item of
manufacturing equipment included in master file
ACCURACY/ <>Unnecessary to test
CLASSIFICATION they were verified in previous audits at the
time they are required
REALIZABLE <>Evaluate whether they should be written down to
VALUE NRV or disclosed separately
PRESENTATION <>Read the terms of loan and credit agreements
& DISCLOSURE NOTE : The PROPER presentation and disclosure
of manufacturing equipment in the F/S must
be evaluated carefully to make sure that
accounting standard is followed
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VERIFYING DEPRECIATION EXPENSES

• Most important objective accuracy

• 2 major concern involved
– Determine whether
client is following a consistent
depreciation policy every period
client’s calculation are correct
• 4 considerations in determining the former:
– Useful life of current period acquisitions
– Method of depreciation
– Estimated salvage value
– Policy of depreciating asset in the year of
acquisition and disposition

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VERIFYING DEPRECIATION EXPENSES

• Useful method
an overall reasonableness test made
by the un-depreciated fixed assets x
depreciation rate for the year
• More detailed test may be needed:
– Recomputing depreciation expenses for selected assets
follow the proper and consistent depreciation policy
or not
– Detailed calculation should be tied in to the total
depreciation calculation

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VERIFYING ENDING BALANCE IN
ACCUMULATED DEPRECIATION
• Accumulated depreciation account
DEBIT part of audit of disposal of
assets
CREDIT part of depreciation expenses

• Little additional testing should be required for the ending balances in

accumulated depreciation

• 2 audit objectives

OBJECTIVES TESTS
DETAIL TIE-IN <>Accum. depreciation as stated in the property
master file = general ledger
ACCURACY <>Accum. depreciation in the master file is accurate
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VERIFYING ENDING BALANCE IN
ACCUMULATED DEPRECIATION

• In some cases, life of PPE maybe significantly

Because of
reduction customers’
such as demand for products
unexpected physical
deterioration
• Necessary to evaluate the adequacy of the allowances for
accumulated depreciation each year

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End of Topic 5a